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NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 2

OBLIGATIONS AND CONTRACTS ARTICLE 1108


Prescription, both acquisitive and extinctive runs against:
Civil Code (1) Minors and other incapacitated persons who have
Articles 1106-1126 parents, guardians or other legal representatives;
(2) Absentees who have administrators, either
TITLE V appointed by them before their disappearance, or
PRESCRIPTION appointed by the courts;
(3) Persons living abroad, who have managers or
CHAPTER 1 administrators;
GENERAL PROVISIONS (4) Juridical persons, except the State and its
subdivisions.
ARTICLE 1106
By prescription, one acquires ownership and other real Persons who are disqualified from administering their
rights through the lapse of time in the manner and under the property have a right to claim damages from their legal
conditions laid down by law. representatives whose negligence has been the cause of
prescription.
In the same way, rights and actions are lost by prescription.
Juridical Persons and Prescription
Prescription They are those endowed by law of the attributes of a natural
It is a mode of acquiring or losing ownership and other real person and hence can acquire and lose properties and rights.
rights through the lapse of time in the manner and under the The State and its subdivisions however, acting in the sovereign
conditions laid down by law. The possession should be: capacity, cannot be subject for prescription.
(a) In the concept of an owner
(b) Public NOTE: If the political subdivision is acting in its proprietary
(c) Peaceful character, prescription will lie against it. Especially when this
(d) Uninterrupted instrumentality does not act under a sovereign capacity.
(e) Adverse
ARTICLE 1109
Prescription does not run between husband and wife, even
It is an extraordinary mode of acquiring ownership thus the
though there be a separation of property agreed upon in the
period must be shown clearly. marriage settlements or by judicial decree.

Classification of Prescription Neither does prescription run between parents and children,
As to whether rights are acquired or lost during the minority or insanity of the latter, and between
1. Acquisitive prescription guardian and ward during the continuance of the
a. Ordinary prescription guardianship.
b. Extraordinary prescription
2. Extinctive prescription Prescription and Relationships
1. Husband and Wife
As to the object or subject matter Generally, prescription does not apply to husband and wife
1. Prescription of property unless the law otherwise provides like in the case of the Family
a. Real property Code where cases of legal separation can prescribe in 5 years.
b. Personal rights
2. Prescription of rights 2. Parent and Minor or Insane Child
The natural bond of filiation is the basis of this rule. Moreover,
Laches while the child is a minor, the parents are his natural guardians
It is the unreasonable delay in the bringing of a cause of action without the need of court appointment. Thus, when the child
before the courts of justice. Therefore, while an action has not reaches the age of majority and is not insane, prescription shall
yet prescribed, it may no longer be brought to the court run against him.
because of laches.
3. Guardian and Ward during Guardianship
It is the failure or neglect, for an unreasonable and unexplained Due to the fiduciary relationship between the guardian and the
length of time to do that which, by exercising due diligence, ward, prescription will not lie during the period of guardianship.
could or should have been done earlier.
ARTICLE 1110
Prescription, acquisitive and extinctive, runs in favor of, or
ARTICLE 1107
against a married woman.
Persons who are capable of acquiring property or rights by
other legal modes may acquire the same by means of
prescription. Prescription and the Married Woman
Whether married or unmarried, prescription runs in favor of or
Minors and other incapacitated persons may acquire against a married woman.
property or rights by prescription, either personally or
through their parents, guardians or legal representatives.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 3

ARTICLE 1111 ARTICLE 1115


Prescription obtained by a co-proprietor or a co-owner shall The provisions of the present Title are understood to be
benefit the others. without prejudice to what in this Code or in special laws is
established with respect to specific cases of prescription.
Co-Ownership and Co-Proprietorship
There is co-ownership whenever the ownership of the Provisions on Prescription
undivided thing or right belongs to different persons. Other statutes and provisions provides for certain prescriptive
Prescription obtained by a co-proprietor or a co-owner shall periods. The more specific provision shall prevail.
benefit the others.
ARTICLE 1116
ARTICLE 1112 Prescription already running before the effectivity of this
Persons with capacity to alienate property may renounce Code shall be governed by laws previously in force; but if
prescription already obtained, but not the right to prescribe since the time this Code took effect the entire period herein
in the future. required for prescription should elapse, the present Code
shall be applicable, even though by the former laws a longer
Prescription is deemed to have been tacitly renounced when period might be required.
the renunciation results from acts which imply the
abandonment of the right acquired. Rules on Transitory Prescriptions
The Civil Code took effect on August 30, 1950, the rules are:
Renunciation of Prescription 1. If lapsed before effectivity, the old rule applies.
In the case of DBP v. Adil, when a debt is already barred by 2. If running from old law until the effectivity of the new
prescription, it cannot be enforced by the creditor. But a new law, but the NCC provides a different period for the
contract recognizing and assuming the prescribed debt would same situation, the NCC shall prevail provided that
be valid and enforceable. such period counted from the effectivity of the NCC
has already lapsed even thought it may not have yet
Therefore, when a party acknowledges the correctness of a debt lapsed under the old law.
and promises to pay It after the same has prescribed and with 3. If the prescriptive period under the old law is still
full knowledge of the prescription he thereby waives the benefit running under effectivity of the NCC and if the
of prescription. remaining balance of such period is shorter than
provided under the NCC, the old prescriptive period
ARTICLE 1113 shall apply.
All things which are within the commerce of man are
susceptible of prescription, unless otherwise provided. CHAPTER 2
Property of the State or any of its subdivisions not PRESCRIPTION OF OWNERSHIP AND OTHER REAL RIGHTS
patrimonial in character shall not be the object of
prescription. ARTICLE 1117
Acquisitive prescription of dominion and other real rights
Imprescriptible to Public Domain may be ordinary or extraordinary.
In DFA v. Fernandez, forest lands of the public domain cannot
be acquired by prescription, its possession however long Ordinary acquisitive prescription requires possession of
things in good faith and with just title for the time fixed by
cannot ripen into private ownership.
law.

Public lands become patrimonial property upon express


Acquisitive Prescription
government manifestation that the property is already
1. Ordinary Acquisitive Prescription
patrimonial and declaration that these are already alienable and
It requires uninterrupted possession for the required statutory
disposable. And only when the property has become
period of years in good faith with a just title.
patrimonial can the prescriptive period for the acquisition of
property of the public domain begin to run.
2. Extraordinary Acquisitive Prescription
Likewise requires an uninterrupted possession for the statutory
ARTICLE 1114
period of ears but without the need of just title and good faith
Creditors and all other persons interested n making the
prescription effective may avail themselves there of on the part of the possessor.
notwithstanding the express or tacit renunciation by the
debtor or proprietor. ARTICLE 1118
Possession has to be in the concept of an owner, public,
Creditors and Other Interested Party peaceful and uninterrupted.
In the event that the time within which to pay has already
prescribed but nevertheless the debtor waives prescription Possession
such that the creditor can still collect from him, and should the 1. In the concept of an owner
debtor again fail to pay, thereby prompting the debtor to The possessor asserts dominion on the property to the
demand payment from the guarantor, the guarantor can resist exclusion of all others. It must be an adverse possession. Thus, a
for he shall not be prejudiced by the act of waiving. lessee is not holding as an owner.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 4

2. Public ARTICLE 1123


This means that there must be a notorious holding of the Civil interruption is produced by judicial summons to the
property known to the community. It must not be surreptitious possessor.
in character because it must be in the concept of an owner.
ARTICLE 1124
Judicial summons shall be deemed not to have been issued
3. Peaceful and shall nor give rise to interruption:
For the period of years required by law for acquisitive (1) If it should be void for lack of legal solemnities
prescription to apply, there must be no valid interference from (2) If the plaintiff should desist from the complaint or
others claiming or asserting their rights to the property. should allow the proceedings to lapse;
(3) If the possessor should be absolved from the
complaint.
4. Uninterrupted
In all these cases, the period of the interruption shall be
ARTICLE 1119 counted for the prescription.
Acts of possessory character executed in virtue of license or
by mere tolerance of the owner shall not be available for the
purposes of possession. Civil Interruptions
It is not the filing of the complaint in court which interrupts but
Possessory Character by License of Mere Tolerance the receipt of the possessor of the judicial summons.
The fact that the possessor holds the property by virtue of the
consent of the owner shows the such possessor acknowledges It is only such that time that jurisdiction is acquired by the court
that somebody else owns the property. of the person and it is at that time possession is uninterrupted.

Possession by tolerance therefore does not imply an assertion EXCEPTIONS: There are instances the judicial summons deemed
of ownership, and thus produces no effect with respect to to not have interrupted prescription.
possession or prescription.
1. Void for lack of legal solemnities
ARTICLE 1120 When the summons as well as the copy of the complaint have
Possession is interrupted for the purposes of prescription, been served by unauthorized person, it shall be deemed as not
naturally or civilly. to have been issued.

Possession must be uninterrupted. This means that there must 2. Plaintiff desists or allow proceedings to lapse
be continuity in the holding of the property. An uninterrupted Desistance from the complaint leads to dismissal. While
possession strengthens the adverse right of the possessor. allowing the proceeding to lapse shows lack of interest to
Possession can however be interrupted naturally or civilly. prosecute the case.

ARTICLE 1121 3. Possessor is absolved from the complaint


Possession is naturally interrupted when through any cause
Absolution means that the complaint has not been fully
it should cease for more than one year.
substantiated to support any adverse claim by the complainant
The old possession is not revived if a new possession should and therefore this should not prejudice the possessor who must
be exercised by the same adverse claimant. always be presumed in good faith.

ARTICLE 1122 ARTICLE 1125


If the natural interruption is for only one year or less, the Any express or tacit recognition which the possessor may
time elapsed shall be counted in favor the prescription. make of the owner’s right also interrupts possession.

Natural Interruptions Express or Tacit Recognition


While he may have possession of the property for a total period One cannot consider himself possessing a property adversely
of 11 years, it is interrupted. When he left the property for two in the concept of an owner if he recognizes somebody else as
years, his subsequent possession of seven years cannot be having a superior right as an owner.
added for purposes prescription. In effect, the material for
purposes of such is the subsequent seven years. ARTICLE 1126
Against a title recorded in the Registry of Property, ordinary
prescription of ownership or real rights shall not take place
Obviously the seven-year period have not yet complied with
to the prejudice of a third person, except in virtue of another
the 10-year period required by law for ordinary acquisitive title also recorded; and the time shall begin to run from the
prescription. recording of the latter.

EXCEPTION: If the interruption is only one year or less. As to lands registered under the Land Registration Act, the
Acquisitive prescriptive will have already set in, in favor of the provisions of the special law shall govern.
possessor because the clearly provides that if the natural
interruption is such period, the time elapsed shall be counted.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 5

Registered Titles
Although prescription will not apply to registered property, the Bad Good Extraordinary Ordinary
doctrine of laches is applicable. Faith Faith
Real 3 1 30 10
The Supreme Court of Catholic Bishop of Balanga v. CA, rejected Property
the assertion of the imprescriptibility of registered property and Personal 2 1 8 4
decided against the petitioner that it was guilty of laches. Property

In this case, the petition filed its complaint in court only after Examples of Application of 1127 and 1128
49 years had lapsed since the donation. There is no explanation • Reliance of a deed of sale which he knew involved a
of the long delay and that inaction for an unreasonable amount different property (Negrete v. CFI)
of time constitutes laches. As such petitioner cannot claim
nullity of the donation as an excuse to avoid the consequences • Knowingly using a forged document to base one’s just
of laches. title is of bad faith (Reyes v. CA)

ARTICLE 1127 ARTICLE 1129


The good faith of the possessor consists in reasonable belief For purposes of prescription, there is just title when the
that the person from whom he received the thing was the adverse claimant came into possession of the property
owner thereof, and could transmit his ownership. through one of the modes recognized by law for the
acquisition of ownership and other real rights, but the
ARTICLE 1128 grantor was not the owner or could not transmit any right.
The conditions of good faith required for possession in
Articles 526, 527, 528 and 529 or his Code are likewise ARTICLE 1130
necessary for the determination of good faith in the The title for prescription must be true and valid.
prescription of ownership and other real rights.
ARTICLE 1131
Possession in Good Faith For the purposes of prescription, just title must be proved; it
Good faith in prescription simply means that the grantor is the is never presumed.
owner.
Just Title
The only defect of the acquisition that is cured by prescription Just title is an act which has for its purpose the transmission of
is that the grantor is not the owner, other than that there will ownership, and which would have transferred ownership if the
be no title and it is useless to determine good or bad faith granted had been the owner.
because there can be no ordinary prescription without just title
(1118). The vice or defect is the one cured by prescription. Like sale,
exchange, donation or succession.
To be in good faith, the possessor must believe that the title for
his acquisition is sufficient; it is not enough that the knows no True Title
defect in it. The belief must be well-founded. To be true, the title must exist, not merely in the mind of the
possessor. A legally non-existent title is without value. Thus, a
The good faith must exist not only at the beginning of the will cannot be a sufficient title if it has been revoked. So is a title
possession, but throughout the entire period required for that is absolutely simulated.
prescription.
• False title – does not exist but is believed to exists, it
Requisites of Good Faith may be based on error. If it refers to a third person, it
Article 526. He is unaware that there exists in his title a flaw is sufficient for prescription if from the possessor it is
which invalidates it. not sufficient.

Article 527. Good faith is always presumed, and upon him who • Revocable title- transferor has made a reservation by
alleges bad faith on the part of the possessor rests the burden which the rights of the possessor may disappear (sale
of proof. with right to repurchase).

Article 528. Possession acquired in good faith does not lose this Valid Title
character except in case and from the moment facts exist show The title for prescription must valid. A void title is insufficient,
that the possessor is not unaware that he possesses the thing but a voidable title, so long as it has not been annulled, can be
improperly or wrongfully. the basis of ordinary prescription.

Article 529. It is presumed that possession continues to be • If with suspensory condition – upon fulfilment
enjoyed in the same character in which it was acquired, until the
contrary is proven. • If with resolutory condition – at once
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 6

ARTICLE 1132 ARTICLE 1137


The ownership of movables prescribes through Ownership and other real right over immovables also
uninterrupted possession for four years, in good faith. prescribed through uninterrupted adverse possession
thereof for thirty years, without need of title or of good faith.
The ownership of personal property also prescribed through
uninterrupted possession for eight years, without need of ARTICLE 1138
any other condition. In the computation of time necessary for prescription the
following rules shall be observed:
With regard to the right of the owner to recover personal (1) The present possessor may complete the period
property lost or of which he has been illegally deprived, as necessary for prescription by tacking his possession
well as with respect to movables acquired in a public sale, to that of his grantor or predecessor in interest.
fair, or market, or from a merchant’s store the provisions of (2) It is presumed that the present possessor who was
articles 559 and 1505 of this Code shall be observed. also the possessor at a previous time, has continued
to be in possession during the intervening time,
Acquisitive Prescription for Movables unless there is proof to the contrary;
Four years with good faith, otherwise eight years. Possession (3) The first day shall be excluded and the last day
must likewise be in the concept of an owner, public, adverse included.
and uninterrupted.
First Rule of Computation: Tacking of Possession
It provides that the present possessor may complete the period
Article 559. Possession of movable property acquired in good
necessary for prescription by tacking his possession that of his
faith is equivalent to title, those unlawfully deprived cannot
grantor or predecessor in interest.
obtain its return without reimbursement.
• This connotes a transfer of property from one person
to another by manner of law.
ARTICLE 1133
Movables possessed through a crime can never be acquired • Thus, if A donated to B a property which was
through prescription by the offender. previously in possession of B for 8 years, A can make
use of the said 8 years for purposes of prescription.
Products and Effects of Crime Hence, if A already was in possession of the property
No one must benefit from an evil act. The offender cannot for three years, the period of his possession may be
acquire title to it even if the prescriptive period has already considered to have been 11 years already.
lapse and the owner did not demand for a return.
NOTE: Tacking is possible only when there is a succession of
ARTICLE 1134 rights between the predecessor and successor. A mere usurper
Ownership and other rights over immovable property are cannot invoke the possession of any previous possessor.
acquired by ordinary prescription through possession of ten
years.
Q. What if the predecessor was in good faith but the successor
is in bad faith?
NOTE: Ordinary prescription means 10 years for real property if
Where the predecessor was in good faith, and the successor is
in good faith.
in bad faith, the latter can assert only extraordinary prescription.
ARTICLE 1135 The period should be computed in proportion that the period
In case the adverse claimant possesses by mistake an area of extraordinary prescription bears to that of ordinary
greater or less, than that expressed in his title, prescription prescription (1 good faith year = 3 bad faith years).
shall be based on the possession.
Q. What if the predecessor was in bad faith and the successor
Constructive Possession in good faith?
The extent of property subject to the prescription shall be the
one possessed or held by the claimant regardless the size The present successive possessor can claim under ordinary
indicated or described in the title. prescription but the possession of the preceding possessor in
bad faith cannot be computed. One who succeeds by hereditary
ARTICLE 1136
title shall not suffer of the wrongful possession of the decedent.
Possession in wartime, when the civil courts are not open,
shall not be counted in favor of the adverse claimant.
Second Rule of Computation: Presumption of Continuance
Wartime It provides the presumption that the present possessor who
During wartime where the civil courts are closed, there is no was also the possessor at a previous time, have continued to be
way by which any person claiming title over a certain property in possession during the intervening time, unless there is proof
can file a case to recover the same from the person in adverse to the contrary. There must be showing of fact that the person
possession of the property. presently possessing the property was also the one in
possession in the intervening time.
Hence the possession of the adverse claimant during that time
shall not be counted. However, it must be observed that the Third Rule: Exclusion of the First Day
civil courts must be closed. First day shall be excluded and the last day shall be included.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 7

CHAPTER 3 ARTICLE 1142


PRESCRIPTION OF ACTIONS A mortgage action prescribes after ten years.

Prescription of Actions Mortgage


It refers to the time within which an action may be brought, or A mortgage is an accessory contract. It is constituted to secure
some act done, to preserve a right. Prescription is a legal and a debt so that if the debtor fails to pay the principal obligation,
not a natural cause of the extinguishment of obligations. the creditor can foreclose on the mortgage by selling the same
in a public sale or bidding and the proceeds thereof are used
Statutes of limitation are acts limiting time which actions shall to pay off the principal debt and interest if any.
be brought. Statutes of limitation do not confer any right of • If there is still deficiency, the creditor can still go
action but enacted to restrict period within which right, against the principal debtor to collect such deficiency
otherwise unlimited be asserted. The purpose of these statutes
are to protect the diligent and vigilant and not those who sleep Prescription of Mortgaged Actions
on their rights. They are considered statutes or repose. The period begins from the day on which it could have been
brought.
Prescription and Laches
Laches is different from statute of limitations. Prescription is ARTICLE 1143
concerned with the fact of delay, while laches looks on effect of The following rights, among others specified elsewhere in
this Code, are not extinguished by prescription.
delay. Matter of time; inequity. Fixed time; equity.
Rights not Extinguished by Prescription
ARTICLE 1139
Actions prescribe by the mere lapse of time fixed by law. (1) To demand right of way under Article 649
a. Compulsory legal easement
Leap Year b. Public Policy - imprescriptibility
For computing the prescriptive period in a leap year, February (2) To bring an action to abate a public or private nuisance
28 and 29 are counted as separate days. (3) Others
a. Right to demand partition of a co-ownership
Effect of Lapse of Time b. Action to declaration marriage void
The lapse of the period of prescription provided by law has the c. Action to declare judgment/contract void
effect of extinguishing the action. No extinctive prescription d. Right to demand support
unless period expires. Prescription must be pleaded. e. Mandamus

ARTICLE 1140 ARTICLE 1144


Actions to recover movables shall prescribe eight years from The following actions must be brought within ten years from
the time the possession thereof is lost, unless the possessor the time the right of action accrues:
has acquired the ownership by prescription for a less period, (1) Upon a written contract;
according to Article 1132, and without prejudice to the (2) Upon an obligation created by law
provisions of Article 559, 1505, 1133. (3) Upon a judgment

Extraordinary Prescription of Movables Actions which must be Brought within Ten Years
A person can recover lost personal or movables property within 1. Upon a written contract
a period of eight years. However, if all the requisites of an • Cause of action when there is breach
ordinary acquisitive prescription of movable property are • Under 1391 it shall be four years
present, the possessor of the same becomes the owner of the • Ticket is a written contract
movable property after only four years uninterrupted • Payment of deficiency after foreclosure
possession in good faith.
2. Upon an obligation created by law
ARTICLE 1141 • Recovery from constructive or implied trust
Real actions over immovables prescribe after thirty years. • Winner to refund loser in gambling
• Obligation of lessor to indemnity the lessee
This provision is without prejudice to what is established for in good faith for improvements
the acquisition of ownership and other real rights by
prescription.
3. Upon a judgment
Extraordinary Prescription of Immovables • When only it is final and executory.
The action to recover immovables is within thirty years. • Judgment may be executed on motion within
However, if within the thirty-year period, all the requisites for five years from the date it becomes final and
ordinary acquisitive prescription are already present in favor of executory. After such lapse of time, and
the possessor, then the possessor shall be considered the before barred by statute of limitation, it may
owner of the property after 10 years of uninterrupted, adverse, be enforced by ordinary action within 10
public possession of the property in the concept of the owner years.
in just title and good faith.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 8

Computation Periods of Action Not Fixed; Five Years


The computation starts form the date the cause of action The right of action or cause of action accrues from the moment
accrues or from the date of the right of the plaintiff is violated. of commission or omission of an act by a party in violation of
his duty to, or right of another.
ARTICLE 1145 (1) Right in favor of the person (obligee)
The following actions must be commenced within six years: (2) A correlative obligation on another (obligor)
(1) Upon an oral contract; (3) An act or omission in violation of such right
(2) Upon a quasi-contract.
Right to Collect Taxes
Actions which must be brought within Six Years
Limitation upon the right of the government to assess and
1. Oral contracts
collect taxes will not be presumed in the absence of clear
2. Quasi-contracts
legislation to the contrary, and where the government has not
It is a juridical relation characterized by certain lawful, voluntary
by express statutory provision provided a limitation upon its
and unilateral acts to the end that no one should be unjustly
right to assess unpaid taxes, such right is imprescriptible.
enriched at the expense of the other.
ARTICLE 1150
ARTICLE 1146 The time for prescription for all kinds of action, when there
The following actions must be instituted within four years: is no special provision which ordains otherwise, shall be
(1) Upon an injury to the rights of the plaintiff; counted from the day they may be brought.
(2) Upon a quasi-delict.
Starting Point for Computation when No Special Provision
Actions which must be brought within Four Years
One cannot be said to being sleeping on his rights if right have
1. Upon an injury to the rights of the plaintiff
not yet accrued. It is the legal possibility of bringing the action
a. Suit questioning the removal a secretary for
which determines the starting point for the computation.
unjustified separation from employment.
b. Action for recovery of damages for taking
Cause of Action
personal property or trespass.
It arises when that which should have been done is not done,
or that which should not have been done is done.
2. Quasi-delict
Article 2176. Whoever by act or omission caused
The moment a breach of right or duty occurs, then the right of
damage to another, there being fault or negligence, is
action accrues, and the action can be legally instituted; from
obliged to pay for the damage done. Such fault or
that moment, prescription of action begins to run.
negligence, if there is no pre-existing contractual
relation between the parties is called a quasi-delict.
ARTICLE 1151
The time for the prescription of action which have for their
ARTICLE 1147 object the enforcement of obligations to pay principal with
The following actions must be filed within one-year: interest or annuity runs from the last payment of the annuity
(1) Forcible entry and detainer; or of the interest.
(2) Defamation
Obligation with Interests
Actions which must be brought within One Year The period of prescription in obligations with interest runs only
1. Forcible entry and detainer from the last payment of interest, is applicable only to cases
a. Computed upon unlawful deprivation where the principal debt is already due.

2. Defamation • When the principal obligation is not yet due, payment


a. Computed when the offended party knows of interest at stipulated intervals does not cause the
of the libelous matter. running of prescription.

ARTICLE 1148 ARTICLE 1152


The limitations of action mentioned in Article 1140 to 1142, The period for prescription of actions to demand fulfillment
and 1144 to 1147 are without prejudice to those specified in of obligations declared by a judgment commences form the
other parts of this Code, in the Code of Commerce and in time the judgment became final.
special laws.
ARTICLE 1153
Suppletory Character The period for prescription of actions to demand accounting
The provisions of Title V on prescription have suppletory runs from the day the persons who should render the same
application to specific cases provided. cease in their functions.

ARTICLE 1149 The period for the action arising from the result of the
All other actions whose periods are not fixed in this Code or accounting runs from the date when said result was
in other laws must be brought within five years from the time recognized by agreement of the interested parties.
the right of action accrues.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 9

Action to Compel Accounting


The period of prescription of an action to compel an accounting
by a joint account partner begins to run from the date of the
retirement of the members from whom accounting is
demanded or from the dissolution of a partnership.

ARTICLE 1154
The period during which the obligee was prevented by a
fortuitous event from enforcing his right is not reckoned
against him.

Fortuitous Event
Such relieves the obligor from liability that might otherwise
arise in the breach of an obligation or excuse and obligee from
his failure to exercise a right that might otherwise constitute a
waiver of said right. No suspension of prescription even during
war when the courts continue to function regularly.

ARTICLE 1155
The prescription of actions is interrupted when they are filed
before the court, when there is written extra0judicial
demand by the creditors, and when there is any written
acknowledgment of the debt by the debtor.

Interruption of Prescription of Action


1. They are filed before the court
• Date of filing and docketing
• Interrupts extinctive prescription
• Interruption lasts during pendency
• Desistance makes it abandoned as it has
never been instituted.

2. There is a written extrajudicial demand by the


creditors
• If addressed to a co-debtor, it will not
interrupt the prescription.

3. There is a written acknowledgment of the debt by the


debtor
• A written offer of payment works as a
renewal of the obligation.

NOTE: Interruption renews or starts a new period of


prescription. It is not a mere suspension. Whatever time has
elapsed is negated and rendered inefficacious.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 10

OBLIGATIONS AND CONTRACTS With Respect to Object of Prescription


Articles 1106-1155 Court held that there must be an official declaration to that
effect before the property may be rendered susceptible to
JURISPRUDENCE NOTES
prescription.
Article 1113. Object of Prescription
Accordingly, there must be an express declaration by the State
that the public dominion property is no longer intended for
REPUBLIC v. ESPINOSA (2012)
public service or the development of the national wealth or that
the property has been converted into patrimonial.
Facts: On March 3, 1999, Domingo Espinosa filed an application
for land registration covering a parcel of land in Cebu. Espinosa
Without such express declaration, the property, even if classified
alleged that the property is (a) disposable, (b) purchased from
as alienable or disposable, remains property of the public
his mother on 1970 and the other heirs waived rights thereto
dominion, and thus incapable of acquisition by prescription.
and (c) he and his predecessor in interest has been in
possession of the property for more than 30 years.
It is only when such alienable and disposable lands are
• Presented Advanced Survey Plan
expressly declared by the State to be no longer intended for
• Two tax declarations under Isabel’s name.
public service or for the development of the national wealth
• Three tax declarations under his name.
that the period of acquisitive prescription can begin to run.

Republic opposed applicating claiming that:


Such declaration shall be in the form of a law duly enacted by
(a) CA 141 or Public Land Act has not been complied and
Congress or a Presidential Proclamation in cases where the
Espinosa’s predecessor-in-interest only possessed the
President is duly authorized by law.
property from June 12, 1945.
(b) The tax declarations do not prove that his possession
In the case: Thus, granting that Isabel and, later, Espinosa
and that of his predecessor-in-interest are in character
possessed and occupied the property for an aggregate period
for the length of time required b law.
of thirty (30) years, this does not operate to divest the State of
its ownership. The property, albeit allegedly alienable and
MTC granted basing the judgment of compliance under PD
disposable, is not patrimonial.
1529. Espinosa was able to establish ownership and possession
over the subject lot which was considered by DENR as alienable
To overcome this presumption, there must be incontrovertible
and disposable land of public domain.
evidence for such. At any rate, as petitioner correctly pointed
out, the notation on the survey plan does not constitute
CA dismissed petition and affirm the MRC decision on 2000.
incontrovertible evidence that would overcome the
The CA ruled that jurisprudence has consistently pronounced
presumption that the property belongs to the inalienable public
that “open, continuous and exclusive possession for at least 30
domain. A mere surveyor has no authority to reclassify the lands
years of alienable public land ipso jure converts the same into
of the public domain.
private property.”
Requirements for the Blueprint Survey
Did Espinosa prove sufficiently that he had ownership of the
The blueprint copy of the advanced survey plan may be
public alienable land by acquisitive prescription?
admitted as evidence of the identity and location of the subject
property if:
Held: Consequently, for one to invoke Section 48(b) and claim
(a) it was duly executed by a licensed geodetic engineer;
an imperfect title over an alienable and disposable land of the
(b) it proceeded officially from the Land Management
public domain based on a thirty (30)-year possession and
Services (LMS) of the DENR; and
occupation, it must be demonstrated that such possession and
(c) (c) it is accompanied by a technical description of the
occupation commenced on January 24, 1947 and the thirty
property which is certified as correct by the geodetic
(30)-year period was completed prior to the effectivity of P.D.
surveyor who conducted the survey and the LMS of
No. 1073.
the DENR.

The earliest tax declaration in Isabel’s name was for the year
Decision: Espinosa failed to prove that the property is
1965 indicating that as of January 25, 1977, only twelve (12)
patrimonial. As to whether Espinosa was able to prove that his
years had lapsed from the time she first came supposedly into
possession and occupation and that of Isabel were of the
possession.
character prescribed by law, the resolution of this issue has
been rendered unnecessary by the foregoing considerations.
It was incumbent upon Espinosa to prove, among other things,
that Isabel’s possession of the property dated back at least to
Application for registration denied. CA decision reversed and
June 12, 1945. That in view of the established fact that Isabel’s
MTC decision reversed and set aside.
alleged possession and occupation started much later, the
lower courts should have dismissed Espinosa’s application
outright.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 11

Article 1126. Registration and Third Persons The Spouses Supapo enjoy the benefits under the Torrens
system for Section 47 of PD 1529 provides that registered land
SUPAPO v. DE JESUS (2015) not subject to prescription. For such is imprescriptible.
• Regardless of the length of that possession, the lawful
Facts: Spouses Supapo filed a complaint for accion publiciana owners have a right to demand the return of their
against Spouses De Jesus to compel respondents to vacate a property at any time if the possession was
piece of land in Quezon. The subject lot was registered and unauthorized or tolerated.
titled under the Spouses Supapo.
On Laches: It cannot be a valid ground to deny the petition. On
The Spouses Supapo did not reside on the subject lot. They also the contrary, for the facts show that:
did not employ an overseer but they sure to visit at least twice 1. Brought the action the Lupon
a year. During one of their visits in 1992, they saw two houses 2. Initiated criminal complaint
built on the subject lot, those were built without their 3. Filed for accion publiciana
knowledge and permission. They learned that the Spouses De The following negate the allegation of laches for the part of the
Jesus and Macario occupied such. Spouses Supapo in bringing their actions.

The Spouses Supapo demanded from respondents the No Res Judicata


immediate surrender of the subject lot by bringing dispute to There is no identity of the following:
the Lupon Tagapamayapa and failed to settle amicably. They (1) Parties. The criminal complaint was prosecuted by the
filed criminal case under the Anti-Squatting Law under PD 772. People of the Philippines and the accion publiciana is
But Congress enacted RA 8368 repealing PD 772 dismissing the by the Spouses themselves.
criminal action. (2) Subject Matter. Anti-squatting law and accion
publiciana are different issues.
Did the action already prescribe and is it barred by res judicata? (3) Causes of action. Criminal case to protect the interest
of the state, the civil case for the interest of the
Accion Publiciana spouses in such case.
It is an ordinary civil proceeding to determine the better right Thus, res judicata cannot be based on such absence of identity.
of possession of realty independent of title. It refers to an
ejectment suit filed after the expiration of one year of unlawful Held: As a final note, we stress that this ruling is limited only to
withholding of possession of realty. the issue of possession. This is not binding in a decision of
ownership, as such this is not a bar for the parties and even
Jurisdiction of the Property Issue third persons to file an action for the determination of the issue
In view of these amendments, the actions involving title to or of ownership.
possession of real property is now determined by its assessed
value. The MeTC acquired jurisdiction of case. Petition granted. Decision of the CA is reversed and set aside.

The Action Has Not Yet Prescribed LAUSA v. QUILATON (2015)


The respondents argue that the complaint for accion publiciana
is dismissible for filing out of time. One their part, the Spouses Facts: It involves Lot No. 557 in Cebu. The petitioners and the
Supapo admit that they filed the complaint for accion respondents are relatives residing in the same lot. Respondent
publiciana more than ten years after the certificate to file an Lopez acquired a portion of Lot No. 557 due to Rodrigo’s
action has prescribed. default on his loan.

The parcel of land is registered under the Torrens system. The Lot No. 557 was part of the Banilad Friar Estate Lands, which
Spouses Supapo acquired the TCT of the lot in 1979. had been bought by the government through Act No. 1120 for
Interestingly, the respondents do not challenge the existence, distribution of its occupants. Martin Antonio was the initial
authenticity and genuine of the TCT of the Spouses Supapo. beneficiary and assigned it to Alejandro Tugot which was the
grandfather of most of the respondents and petitioners.
Respondents rest their case on the fact they have been in actual,
public, peaceful and uninterrupted possession of the subject Alejandro possessed the lot until his death, thus his children
property in the concept of an owner since 1992. The contend and grandchildren continued to reside in the lot. The present
they built such in good faith and having possessed the lot for controversy arose when the respondents claiming to be its
more than 10 years. registered owners, attempted to eject the petitioners.

Lands covered by a title cannot be acquired by prescription In 1994, Mauricia donated Lot No. 557 to her four children thus
or adverse possession. Acquisitive prescription is baseless the TCT No. 571 was cancelled and was reissued as four TCT’s
when the land involved is a registered land because Article 1126 for the children. The children of Mauricia then performed
of the Civil Code provides such. several acts of ownership on the property.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 12

Rodrigo: Mortgaged his TCT to Lopez as security loan but Issue 3: CA erred rely on fake title to deny prescription
defaulted leading to foreclosure and was sold to public auction Ca concluded that it cannot prescribe for it was under the
to Lopez issuing a new TCT. Torrens system. Still, the lot cannot be acquired through
prescription but for a different reason.
RTC’s Ruling:
1. TCT No. 571 was a forgery and declared it and all titles The Deed of Assignment between Antonio to Alejandro was
originating from it as void ab initio. cancelled three months after execution, thus it could have not
2. Mauricia’s previous acts show that she acknowledged vested Antonio’s rights over Lot No. 557. Thus, it reverted to its
Alejandro’s ownership over Lot No. 557. original status as a subject of conditional sale between
3. She exercised dull acts of ownership over Lot No. 557 Bureau of Lands and Antonio upon full payment.
only in 1994, after she had filed a petition for issuance • Under Act No. 1120 for the administration, temporary
of new owner’s duplicate. lease and sale of friar lands until full payment.
4. Failed to present evidence showing how she acquired
the title of Lot No. 557. And as Alejandro’s heirs both Three possible scenarios:
the petitioners and respondents are entitled to share. 1. Antonio completed payment and it would be
5. Lopez’ TCT is null and void and could not claim the registered under Antonio’s name. Land registered
defense of a purchaser in good faith. under the Torrens system cannot be acquired through
prescription.
CA’s Reversal of RTC Ruling 2. If he failed, the title remains with the government. And
TCT No 571 is valid as the existence of the copy in the Register as such, prescription will not run against the
of Deeds and was issued in a regular manner. Failed to disprove government (1107).
the presumption of regularity. There is no showing that indeed 3. Another person could have bought the rights.
the title was fraudulently issued. All these scenarios negate the possibility of prescription.
• The deed of assignment on the other hand was
canceled as shown in the DENR File thus the property Effects of the Nullity of TCT No. 571
remained with Antonio not Alejandro. Neither Mauricia nor Alejandro has title over Lot No. 557. A
• CA noted that the lot Alejandro appears to own was person only transmits rights that he possesses. When innocent
Lot No. 357 not 557 as shown by evidence. third persons, however purchase or acquire rights over the
• (1) Mauricia has in possession the property since 1946 property relying on correctness of the certificate of title, courts
and (2) it is a registered lot under the Torrens system. cannot disregard the rights they acquired and order the
cancellation of the certificate
Have the petitioners acquired ownership and possession of Lot
No. 557 by acquisitive prescription? Innocent purchasers in good faith may safely rely on the
correctness of the certificate of title issued therefor, and neither
Issue 1: CA erred that Alejandro Owned Lot 357 not 557 the law nor the courts can oblige them to go behind the
CA based its conclusion on several tax documents in the name certificate and investigate again the true condition of the
of Alejandro Tugot indicating such. It overlooked the evidences: property.
1. Testimony of the Assessor’s Office that he issued a • They are those who buy the property of another,
certification of correction from 357 to 557. without notice that some other person has a right or
2. The Lot 357 is covered by another address in the city’s interest in such property and pays a full price for the
base map by a certain Antonio Yap. same, at the time of such purchase or before has
3. The Deed of Donation recognizes Alejandro as the notice of the claims or interest of some other person
owner of Lot 557. in the property.
4. Court approved subdivision plan. • It covers innocent lessee, mortgagee or encumbrancer
for value but not donee.
Issue 2: CA erred on Failure to Prove Fabricated TCT
It overlooked the evidence that the petitioners presented the The TCT’s issued to Mauricia must be cancelled for there is no
fabricated title. The signatures where checked and all these ownership for such.
pieces of evidence by preponderance of such prove that TCT
No. 571 is a fabricated title. Lopez is not an innocent purchaser for value of Lot 557-A.
1. There are discrepancies and different area was As a rule, a person dealing with registered land has a right to
covered by the ‘originated’ title rely on the Torrens certificate and to dispense with the need for
2. 571 had discrepancies with 570 and 572, it used an old further inquiring over the status of the lot. But there are
form and was signed by a different Acting Register of exceptions:
Deeds. Differences in the signature. • When the purchaser has actual knowledge of the facts
The allegation that she brought from Antonio is negated by the and circumstances that would compel a reasonably
content of the ‘originate’ title, TCT 16534 which covered a cautious man to inquire to the status of the lot.
different property.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 13

• The presence of anything that excites or arouse • Public are little favored. They should not be invoked
suspicion should them prompt the vendee to look except in rare and unusual circumstances.
beyond the certificate and investigate the title. • They must be applied with circumspection and should
• Without such inquiry, that buyer can hardly be be applied only in those special cases where the
regarded as a buyer in good faith. interests of justice clearly require it.

In the case: Lopez made the following admission that she did In the case: For nearly twenty years (starting from the issuance
an actual inspection and accordingly found that Rodrigo did of St. Judes titles in 1966 up to the filing of the Complaint in
not reside on Lot No. 557-A. The ejectment case was also filed 1985), petitioner failed to correct and recover the alleged
five months after the mortgage contract, she would have found increase in the land area of St. Jude.
Filadelfa residing in it not Rodrigo and such fact should have
prompted her to check the validity of the title. Its prolonged inaction strongly militates against its cause, as it
is tantamount to laches, which means the failure or neglect,
Held: No decision on ownership. They have resided since 1915 for an unreasonable and unexplained length of time, to do that
but it cannot be ignored that the evidence showing none of which by exercising due diligence could or should have been
them can rightfully own Lot 557 especially acquisitive done earlier; it is negligence or omission to assert a right within
prescription cannot operate for the and that the TCT they had a reasonable time, warranting a presumption party entitled
was fake. to assert it either has abandoned it or declined to assert it.
• Surveyors erred for such.
Direct investigation for the Land Management Bureau and to the • None of the neighboring owners ever complained.
Ombudsman on how the fake TCT ended up in the Register of • There was no actual damage to third persons.
Deeds for determination of Liability. TCTs are declared null and
claim for recognition of ownership is denied. Torrens Title and Good Faith
Where innocent third persons, relying on the correctness of the
Article 1135. Possession by Mistake of an Area Greater or certificate of title, acquire rights over the property, courts
Less than that Expressed in the Title cannot disregard such rights and order the cancellation of the
certificate. Such cancellation would impair public confidence in
REPUBLIC v. CA and SANTOS (1999) the certificate of title, for everyone dealing with property
registered under the Torrens system would have to inquire in
Facts: St. Jude’s enterprises is the registered owner of Lot 865- every instance whether the title has been regularly issued or
B-1 as part of Lot 865-B in Caloocan with an area of 40,623 not. This would be contrary to the very purpose of the law,
square meters. In 1966, it subdivided the lot and cancelled TCT which is to stabilize land titles.
No. 22660 for TCT no 23967-24068 all in the name of St. Judes
Enterprises. The subdivision of the lot was later found to have In the case: When private respondents-purchasers bought
expended from 40,623 to 42,044 square meters with an increase their lots from St. Jude, they did not have to go behind the titles
of 1,421 square meters. This expanse or increase in area was thereto to verify their contents or search for hidden defects or
confirmed by the Land Registration Commission. inchoate rights that could defeat their rights to said lots.
Although they were bound by liens and encumbrances
Some of the titles were cancelled for they were sold to the annotated on the titles, private respondents-purchasers could
different buyers. But the Solicitor general filed an action seeking not have had notice of defects that only an inquiry beyond the
the annulment and cancellation of Transfer Certificates face of the titles could have satisfied.
principally on the ground that the TCT were issued on the • No proof of bad faith.
strength of a null and void subdivision plan which expanded • The area measurement was not eve precise and the
the original area from 40,623 to 42,044 square meters. new size is more precise and more accurate.
• Contended that they are acquired in good faith.
• Enterprise argues that the government is now in Torrens system. We cannot, therefore, adhere to the
estoppel to question the approved subdivision plan petitioner’s submission that, in filing this suit, it seeks to
and the allegation of increase was without any basis in preserve the integrity of the Torrens system. To the contrary, it
fact and in law. is rather evident from our foregoing discussion that petitioners
action derogates the very integrity of the system.
RTC denied for there was no one to blame for the increase but
the plaintiff and allowed and approved subdivision plan. There Time and again, we have said that a Torrens certificate is
was absence of complaints from the owner who were allegedly evidence of an indefeasible title to property in favor of the
encroached. CA affirmed. person whose name appears thereon.

Estoppel Against the Government Held: Petition is denied, and Decision is Affirmed.
As a rule, the State cannot be put in estoppel by the mistake or
error of tis officials or agents.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 14

Article 1137. Prescription of Ownership and Only lands of the public domain subsequently classified or
Other Real Rights declared as no longer intended for public use or for the
development of national wealth, or removed from the sphere of
ANDRES v. STA. LUCIA REALTY (2015) public dominion and are considered converted into patrimonial
lands or lands of private ownership, may be alienated or disposed
Facts: Petitioners and Liza filed a complain about easement or through any of the modes of acquiring ownership under the Civil
right of way against respondent before the RTC and alleged that Code.
they are co-owners and possessors for more than 50 years of
three parcels of three unregistered parcels of land in Rizal. And if the mode of acquisition is prescription, whether ordinary
or extraordinary, it must first be shown that the land has
The respondent acquired the lands surrounding the property already been converted to private ownership prior to the
developed into a rental subdivision and built a concrete requisite acquisitive prescriptive period. Otherwise, Article
perimeter fence around it such that petitioners and Liza were 1113 of the Civil Code, which provides that property of the State
denied access from the property to the nearest road and vice not patrimonial in character shall not be the subject of
versa. prescription, applies.

Petitioners preset stories of claiming the land and that they Property is an unregistered public agricultural land. In the
already reside in 1948 and that there were tax declarations and absence of such proof of declaration in this case, petitioners'
sought it to registered under DENR. Respondent present the claim of ownership over the subject property based on
Municipal Assessor and confirmed that there was denial of the prescription necessarily crumbles. Conversely, they cannot
application of Carlos for issuance of tax declaration. demand an easement of right-of-way from respondent for lack
of personality.
RTC: The 50-year possession was not denied and was impliedly
admitted and ratiocinated under Article 1137 of the Civil Code Article 1142. Mortgage Action
that they considered as owners of the subject property through
extraordinary prescription, having real right they can demand MAYBANK PHILIPPINES v. TARROSA (2015)
easement of right of way.
Facts: On December 15, 1980 the Spouses Tarrosa obtained
CA: Evidence was insufficient to show that petitioner are from the petitioner a loan of P91,000 and was secured by an
owners and possessors of the subject property. It held reverse REM over a 500 sq.m. parcel of land in San Carlos City.
the RTC and that they have no right to demand easement of
right of way from the respondent. She obtained another loan in the amount of P60,000 but failed
to settle the second loan upon maturity. In 1998, the Spouses
Are petitioners entitled to demand an easement of right-of-way received a final demand letter requiring them to settle their
from respondent? outstanding loan in aggregate of P564.579.91. They offered to
pay a lesser amount which the Maybank refused.
Easement of Right-of-Way
Article 649 of the Civil Code it can be demanded by the owner Spouses Tarrosa filed a complaint for declaration of foreclosure
of an immovable or by any person who by a real right may and of public auction sale for the following grounds:
cultivate or use the same. (a) Second loan was an unsecured loan
(b) After receiving demand, they tried to pay
Petitioners argue that they are entitled to demand such (c) Right to foreclosure has prescribed or is barred by
because they are the owners of the subject property and that laches.
they already acquired ownership by means of ordinary
acquisitive prescription. And since more than 10 years had Petitioner argued that the Spouses Tarrosa’s positive
lapsed form that time without the Blancos doing anything to acknowledgment of the admission of their indebtedness
contest such, they have acquired. controverts the defense of prescription.

Petitioners now assert alternatively that also through RTC: Maybank’s right to foreclose has already prescribed
extraordinary acquisitive prescription they have been: considering the lack of any timely action, extrajudicial demand
1. Open, continuous and peaceful possession of the or written acknowledgement by the debtor.
property for more than 50 years.
2. Property is alienable and disposable. CA: Affirmed for Maybank failed to present evidence of any
3. Carlos filed a claim of ownership to DENR. timely written extrajudicial demand or written acknowledgment
4. Carlos manifestation of willingness to declare property by the debtors of their debt that could have effectively
for taxation purposes. interrupted the running of the prescriptive period.

Held: Even if timely raised, such argument of petitioners both Whether the action for foreclosure has prescribed.
of ordinary and extraordinary acquisitive prescription fails.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 15

Prescription of Mortgage Actions 8. An absolute deed of sale containing the above provisions and
An action to enforce a right arising from a mortgage should be standard warranties on conveyances of real property shall be executed
enforced within ten (10) years from the time the right of by the co-owners in favor of CRC or its assignee/s and the same
delivered to the latter together with the original certificate of title upon
action accrues. When the mortgagor defaults in the payment
payment of the purchase price less the advances made by CRC in
of his obligation to the mortgagee, otherwise it will be barred accordance with Paragraphs 2 and 3 above; provided, that payment
by prescription and the mortgagee will lose his right over the shall be made by CRC only upon presentation by the co-owners to CRC
mortgage. of certificate/s and/or clearances, with corresponding receipts, issued
by the appropriate government office/s or agency/ies to the effect that
Debtor is in Default When: capital gains tax, real estate taxes on the Property and local transfer tax
(a) The obligation be demandable and already liquidated; and other taxes, fees or charges due on the transaction and/or on the
(b) The debtor delays performance Property have been paid.
(c) The creditor requires the performance judicially or
Respondents asked for several cash advances which reached a
extrajudicially unless demand is not necessary.
total amount of P217,000 to be deducted from the purchase
price of P400,000. After paying the advances CRC constructed
Thus, it is only when demand to pay is unnecessary in case of
staff houses and improvements. The respondents executed an
the circumstances, or when required, such demand is made and
SPA to Hojila allowing him to perform step necessary to cause
subsequently refused that the mortgagor be consider in default
the land subject of Offer to Sell for the accomplishment.
and the mortgage obtains the right to file an action to collect
the debt or mortgage.
CRC stopped operation, the DBP took over and turned the
CRC’s equity Asset Privatization Trust and function is to take
In the case: Maybank reckoned from the maturity of the
title and possession of, provisionally mange and dispose of
second loan and that demand was unnecessary for the accrual
nonperforming asserts of government financial institutions.
of cause of action. The paragraph 5 in the REM merely
Thus, from CRC the party is the Republic of the Philippines.
articulated the bank’s right to elect foreclosure upon refusal.
• Respondent’s compained for the delivery of the title
and execution of the deed of absolute sale and of the
In no way did it affect the general parameters of default, the
full payment and mentioned three letters that were
need of prior demand under Article 1169. For there was no
sent to the respondent on 1991, 1999.
express demand. Hence, the CA erred in construing the
condition as one which dispended demand as a condition for
RTC: Written contract was executed on 7 December 1981, then
the accrual for demand of right to foreclose and mistakenly
the complaint that was filed more than eighteen (18) years since
reckoned from the maturity date of the second obligation.
the contract was executed was beyond the 10-year prescriptive
period. Within that 18-year period, there was no act on the part
In the absence of showing that demand is unnecessary for the
of petitioner, whether judicial or extrajudicial, to interrupt
loan obligation to become due and demandable. Maybank’s
prescription.
right to foreclose the REM accrued only after the lapse of the
period indicated in the final demand letter for Sps. Tarrosa
CA: The subject property is a patrimonial property of the State
to pay which is after the lapse of five (5) days from receipt.
when APT became the controlling stockholder of CRC,
prescription may run against the State. Thus, the reasonable
Held: Considering that the existence of the loan had been
period within which to register the property is three (3) years.
admitted, the default on the part of the debtors-mortgagors’
ad been duly established, and the foreclosure proceedings had
According to the Court of Appeals, the cause of action of
been intitated within the prescriptive period as aforediscussed,
petitioner accrued three (3) years from the time the
there is no more basis to nullify the extrajudicial foreclosure of
Contract was executed on 7 December 1981 or, to say the
the sale.
least, on 15 August 1984 when Hojilla sent the
acknowledgment letter dated 15 August 1984, at which
Article 1144. Actions that Prescribe Within Ten Years
time it became clear that respondents could no longer fulfill
their obligation.
REPUBLIC v. BAÑEZ (2015)

Whether or not the complaint for specific performance was filed


Facts: In 1976, Bañez and the respondents offered for sale a
beyond prescriptive period.
parcel of land with an area of 20,000 sq.m. in Abra to CRC. They
executed a letter irrevocably giving the CRC the option to
Petitioner: Argues interruption due to a written
purchase the subject property, which CRC accepted.
acknowledgment of the respondent’s obligation and demand
by petitioner.
2. The co-owners shall take all necessary steps to cause the CRC Portion
to be brought under the operation of Republic Act No. 496, as
amended, and to cause the issuance in their name of the corresponding The argument based on Article 1155 of the CC which it is
original certificate of title, all of the foregoing to be accomplished interrupted by a written extrajudicial demand by the creditors
within a reasonable time from date hereof. Xxx and when there is a written acknowledgment of the debtor.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 16

Petitioner refer to the letter sent to Hojilla to the former dates Prescription of Written Contracts
15 August 1984 on 1991 and one 1991. In the first letter, An action based on a written contract must be brought within
respondents affirmed that they will cliam full payment of the ten (10) years from the time the right of action accrued.
property upon presentation of a clean title. Accordingly, a cause of action on a written contract accrues
only when an actual breach or violation thereof occurs.
Respondent: Article 1144 which provides that actions upon a
written contract must be brought within ten years from By the contract between the herein parties, the cause of action
execution. Because the complaint was filed beyond the 10-year accrued at the point when the reasonable time within which
prescriptive period, the action was already barred by the Statute to present the title lapsed. The parties did not determine the
of Limitations. Further, during such period, petitioner failed to act date when the respondents must present the title and other
either judicially or extrajudicially to effectively interrupt the documents to the petitioner. The parties only agreed that the
running of the prescriptive period. Thus, the complaint must be respondents must present the same within a "reasonable time."
dismissed for having been extinguished by the Statute of
Limitations. 10-year: The consequence is stated in Article 1155 of the Civil
Code. It states, "[t]he prescription of actions is interrupted when
Hojilla’s Letter of 1984 they are filed before the court, when there is a written
Hojilla updated petitioner of the status of the subject property’s extrajudicial demand by the creditors, and when there is any
title for it is now in the process of preparing for petition papers written acknowledgment of the debt by the debtor." Following
for such. There is no other logical conclusion that the letter is the law, the new ten-year period for the filing of a case by the
an acknowledgment of the respondents to the Contract. petitioner should be counted from 29 May 1991, ending on 29
• The letter served to update petitioner of the status of May 2001. The complaint at bar was filed on 10 April 2000, well
the title, an obligation agreed upon by the parties in within the required period.
the Contract.
• A written acknowledgment of debt or obligation of Held: To rule in favor of respondents despite their failure to
respondents. Which effectively interrupts the running perform their obligations is the height of injustice. Respondents
of the prescriptive period and set a new one. cannot benefit from their own inaction and failure to comply
with their obligations in the Contract and let the petitioner
1991 Letters suffer from respondents' own default.
Clearly, the 29 May 1991 and 24 October 1991 letters
demanded respondents to return the properties, discontinue Article 1146. Actions that Must Be Filed Within Four Years
the construction, repair, demolition and occupancy of several
staff houses, and unlock the gates, which is to enforce MONTERO v. TIMES TRANSPORATION (2015)
respondents' obligations pursuant to paragraph 7 of the
Contract. Facts: Employed under TTCI are the 21 petitioners. In 1995, they
formed a union TEU which was certified as sole and exclusive
Pursuant to Article 1155, they are demand letters to enforce bargaining unit of TTCI. In 1997 they went on a strike but was
respondents' obligation under the Contract, which is to cede given a return-to-work order and enjoined the parties from
possession to petitioner. The letters interrupted the running of committing any other act.
the prescriptive period which commenced to run anew.
TTCI adopted a company-wide retrenchment program of both
Hojilla’s SPA employees and equipment. The sale of 25 buses were approved
Hojilla is neither the proper party to execute the Contract nor and transferred to Mencorp by virtue of a Deed of Sale and the
the proper party to receive the demand letters on behalf of workers received notices of retrenchment.
respondents.
For a second time they declared another strike but was order
Also, one glaring fact that cannot escape us is Hojilla's to return to work. In December 4, 1997, Santiago served to the
representation and guarantee that petitioner's obligation will Department of Labor and Employment Regional Office I a
only arise upon presentation of a clean title and execution of a notice that TTCI would be closing its operations due to heavy
Deed of Sale signed by the respondents' heirs, which reads, business losses.
"[t]he Bañez heirs will only claim for the full payment of the
property upon presentation of a clean title and execution of a Four years later, several complaints for unfair labor practice,
Deed of Sale signed by the heirs. Clearly, the respondents are illegal dismissal with money claims, damages and attorney’s
estopped by the acts and representations of their agent. fees were filed against TTCI.

Assuming further that Hojilla exceeded his authority, the TTCI asserted that the petitioners’ cause of action had already
respondents are still solidarity liable because they allowed been barred by prescription because the complaints were filed
Hojilla to act as though he had full powers by impliedly ratifying only in June 2002 or after almost five years from the date of
Hojilia's actions—through action by omission. their dismissal.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 17

Labor Arbiter: According to the LA, the complaints of these 10


petitioners were timely filed in June 2002 because the eight-
month period during which their cases were pending should be
excluded from the four-year prescriptive period.

NLRC: Dismissed by prescription. hose to be selective in


awarding relief to the 10 complainants by stating in his decision
that the period during which the labor cases were pending
should be deducted from the period of prescription.

CA: Dismissed by petition due to the four-year prescriptive


period has already elapsed.

Whether or not the petitioner’s complaint for illegal dismissal


have already prescribed.

Article 1146 on Injury on the Rights


Date of termination: October 26, 1997 and November 24, 1997.
Settled is the rule that when one is arbitrarily and unjustly
deprived of his job or means of livelihood, the action instituted
to contest the legality of one’s dismissal from employment
constitutes, in essence, an action predicated upon an injury to
the rights of the plaintiff, as contemplated under Article 114635
of the New Civil Code, which must be brought within four years.

Voluntary withdrawal effectively cancelled the tolling of the


prescriptive period within which to file their illegal dismissal
case, leaving them in exactly the same position as though no
labor case had been filed at all.

The running of the four-year prescriptive period not having


been interrupted by the filing of NLRC RAB-I-01-1007, the
petitioners’ cause of action had already prescribed in four years
after their cessation of employment on October 26, 1997 and
November 24, 1997. Consequently, when the petitioners filed
their complaint for illegal dismissal, separation pay, retirement
benefits, and damages in 2002, their claim, clearly, had already
been barred by prescription.

Held: Petitioners have no one but themselves to blame for their


own predicament. By their own allegations in their
respective complaints, they have barred their remedy and
extinguished their right of action.

Although the Constitution is committed to the policy of social


justice and the protection of the working class, it does not
necessary follow that every labor dispute will be automatically
decided in favor of labor. The management also has its own
rights. Out of concern for the less privileged in life, this Court,
has more often than not inclined, to uphold the cause of the
worker in his conflict with the employer.

Such leaning, however, does not blind the Court to the rule that
justice is in every case for the deserving, to be dispensed in the
light of the established facts and applicable law and doctrine.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 18

OBLIGATIONS AND CONTRACTS 3. Object or Prestation


Civil Code The object is not a thing but a particular conduct of a
debtor. It is the subject matter of the obligation which
Articles 1156-1178
has an economic value or susceptible to pecuniary
TITLE I. – OBLIGATIONS substitution in case of non-compliance.

CHAPTER 1 4. Juridical Tie or Vinculum Juris


GENERAL PROVISIONS The vinculum by which the debtor is bound to in favor
of the creditor to perform the prestation. It is
ARTICLE 1156 determined by knowing the sources of obligation
An obligation is a juridical necessity to give, to do or not to
under Article 1157. This is also known as the efficient
do.
cause or the legal tie.
Obligation, Definition
A juridical relation between two persons, known as a creditor Kinds of Prestation
and debtor, whereby the former can demand from the latter the 1. “to give”
observance of a determinate conduct and in case of breach, Consists of the delivery of a movable or immovable
may obtain satisfaction from the assets of the latter. thing which is either determinate (specific) or
• Juridical necessity – connotes that in case of non- indeterminate (generic). This is in order to create a real
compliance, there will be legal sanctions. right, or for the use of the creditor, of for its simple
possession, or in order to return to the owner.
Characteristics of an Obligation
1. It represents an exclusively private interest. 2. “to do”
2. It creates ties that are by nature transitory. Involves all kinds of work or services, whether physical
3. It involves power to make the juridical tie effective in or mental, but in most cases the essence of the act
case of non-fulfillment through an economic man not be such, but merely the necessity of
equivalent obtained from the debtor’s patrimony. concluding a juridical operation, such as, when a
person promises to give a bond.
Types of Obligations
1. Civil Obligations 3. “not to do”
Those which derive their binding force from positive A negative obligation which consists of abstaining
law, and can be enforced by court action or the from some act it includes “not to give”.
coercive power of public authority.
Requisites of Prestation
2. Natural Obligations 1. It must be physically and juridically possible.
Refer to those which derive their binding force from 2. It must be determinate or at least determinable
equity and natural justice; and its fulfillment cannot be according to pre-established elements or criteria.
compelled by court action but depends exclusively 3. It must have a possible equivalent in money or
from the conscience of the debtor. pecuniary value.

3. Moral Obligations ARTICLE 1157


Obligations arise from:
Those which arise from moral law developed by the
(1) Law;
church and not enforceable in court. It deals with the (2) Contracts;
spiritual obligation of a person in relation to his God (3) Quasi-contracts;
and church. (4) Acts and omissions punished by law; and
(5) Quasi-delicts
ELEMENTS OF AN OBLIGATION
1. Active Subject Exclusive Enumeration
Known as the obligee or the creditor, he has the power No obligation exists if source is not one of those enumerated:
to demand the prestation. It is he who in his favor the • By law
obligation is constituted, established or created; it is • By bilateral acts – contracts
he who has the right to demand. • By unilateral acts – delicts and quasi-delicts

2. Passive Subject Unilateral Promise


Known as the obligor or the debtor, he is the one Unilateral agreements may give rise to obligations without
bound to perform the prestation. He is the passive need of acceptance. Here the one promising the reward or prize
subject because without demand, there will be no acquires an obligation to pay, but the offer is to public in
action. Has the juridical necessity of adjusting his general, no specific acceptance is possible.
conduct to the demand of the creditor pursuant to the
obligatory tie.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 19

ARTICLE 1158 2. Solutio Indebiti


Obligations derived from law are not presumed. Only those Article 2154, for if something is received when there is no right
expressly determined in this Code or in special laws are to demand it, and it was unduly delivered through mistake, the
demandable, and shall be regulated by the precepts of the
obligation to return such arises.
law which establishes them; and as to what has not been
foreseen, by the provisions of this Book.
ARTICLE 1161
Civil obligations arising from criminal offenses shall be
Agreement Unnecessary
governed by penal laws, subject to the provisions of Article
When we say that law is an independent source of obligations,
2177, and of the pertinent provisions of Chapter 2,
it does not mean that law and human acts exclude each other Preliminary Title on Human Relations, and of Title XVIII of
completely. The law cannot exist as a source of obligations, this Book, regulating damages.
unless the acts to which its principles may be applied exist.
Civil Liability arising from Crimes
But once those acts or facts exist, the obligations arising Under Article 100 of the RPC, every person criminally liable is
therefrom by virtue of express provisions of the law are entirely also civilly liable. The plain inference from this provision is that
independent of the agreement of the parties. the civil liability springs out and is dependent upon facts which
would constitute a crime.
Obligation Not Presumed
Under the terms of this article, obligations derived from law are ARTICLE 1162
not to be presumed. Only those expressly provided for in this Obligations derived from quasi-delicts shall be governed by
Code or in special laws are enforceable. the provisions of Chapter 2, Title XVII of this Book, and by
special laws.
ARTICLE 1159
Concept of a Quasi-Delict
Obligations arising from contracts have the force of law
between the contracting parties and should be complied Article 2176 defines such that whoever by act or omission
with in good faith. causes damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or negligence,
Principle of Autonomy of Will if there is no pre-existing contractual between the parties is
The parties can stipulate anything under their freedom as long called a quasi-delict.
as its terms are not contrary to law, public policy or public order.
Contracts are perfected by mere consent, and from that Basis for Liability
moment parties are bound not only to the fulfillment of the It is founded upon an undisputable principle of equity; namely,
stipulations but also to the consequences. that fault or negligence cannot prejudice anyone else besides it
author. In no cases should its consequences be borne by him,
NOTE: Attorney’s contracts are not entitled for the court can becomes the victim of the results.
ignore it and limit the recovery to reasonable compensation if
the court finds it to be unreasonable. Negligence
It is the failure to observe for the protection of the interests of
ARTICLE 1160 another person that degree of care, precaution, vigilance which
Obligations derived from quasi-contracts shall be subject to the circumstances demand. It is relative changing with the
the provisions of Chapter 1, Title XVII of this book. circumstances of the persons involved, time and place.
1. There is fault or negligence on the part of the
Concept of Quasi-Contract
defendant resulting to a wrongful act or omission.
It is a juridical relation which arise from certain lawful,
2. There is damage or injury suffered by another person.
voluntary, and unilateral acts, to the end that no one may be
3. There is a direct causal relationship between the fault
unjustly enriched or benefited at the expense of another.
and the injury.
• Lawful, distinguishing it from a delict.
• Voluntary, distinguishing it from a quasi-delict.
CHAPTER 2
• Unilateral, distinguishing it from a contract. NATURE AND EFFECT OF OBLIGATIONS

Examples of quasi-contracts and principles: ARTICLE 1163


Every person obliged to give something is also obliged to
1. Negotiorum Gestio or Inofficious Manager take care of it with the proper diligence of a good father of a
Juridical relation takes place when somebody takes charge of family, unless the law or the stipulation of the parties
requires another standard of care.
the agency or management of the business or property of
another without any power from the latter.
Delivery of Generic or Indeterminate Objects
A generic thing is one indicated only by its kinds, without being
The owner shall reimburse the gestor for the necessary and
designated and distinguished from others of the same kind. It
useful expenses incurred by the latter, and for the damages
is determinable and becomes determinate from the time the
suffered by him in the performance of his functions.
obligation has been fulfilled or performed.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 20

Limited generic obligation is when the generic object is Kinds of Fruits


classified to a particular class. The class now then is considered 1. Natural - spontaneous products of the soil, the young
in itself a determinate object. Thus, an obligation to deliver one and other products of animals;
of my horses refers to a limited generic object, because the 2. Civil - Rent of buildings, price of leases of lands, etc.
thing is limited to the horses owned by the debtor. 3. Industrial - Those produced by lands of any kind
through cultivation and labor;
Delivery of a Determinate Thing
It is one that is individualized and can be identified or Classes of Delivery or Traditio
distinguished from others of its kind. In an obligation to deliver 1. Real or Actual Traditio
a determinate things there are three accessory obligations: This contemplates the actual delivery of the thing from the
1. Obligation to preserve the thing with due care. hand of the grantor to the hand of the grantee, it is a personal
2. Obligation to deliver the fruits. property. If it is a real property, it is manifested by certain
3. Obligation to deliver the accessions and accessories. possessory acts executed by the grantee with the consent of
the grantor such as by taking over the property; occupying the
Diligence Required property.
The law requires the debtor to exercise diligence of a good
father of a family as a legal standard. This is a duty to preserve 2. Constructive Traditio
the thing in a condition suitable for its enjoyment by the When the delivery of the thing is not actual but representative
creditor for the purpose contemplated. or symbolical in essence. But there must be intention to deliver
the ownership.
Breach, Effects
One can become liable for the damages for failing to exercise Kinds of Constructive Tradition
diligence over the delivery of an object unless the loss or 1. Traditio Symbolica – delivery of certain symbols or
damage is due to a fortuitous event. things representing the thing to be delivered such as
keys or titles.
ARTICLE 1164
The creditor has a right to the fruits of the thing the time the 2. Traditio Instrumental – consists in the delivery of the
obligation to deliver it arises. However, he shall acquire no instrument of conveyance to the grantee by the
real right over it until the same has been delivered to him.
grantor.
Right to the Fruits
3. Traditio Longa Manu – consists in the pointing to a
The creditor, in an obligation to deliver a determinate thing, is
movable property within sight by the grantor to the
entitled to the fruits from the time when the obligation to
grantee but which at the time of the transaction, the
deliver arises. The time of delivery differs to the type of
thing could not be placed yet in the possession of the
obligation and to the suspensory or resolutory conditions.
grantee.
The obligation to deliver arises usually when these are present:
4. Traditio Brevi Manu – consists in the grantee’s
1. Perfection of contract if there is no term or condition.
continuation of his possession over the thing
2. From the moment the term or condition arrives.
delivered but now under a title of ownership as in case
of a lessee who has purchased the property leased to
Real Right
him.
It is the power belonging to a person over a specific thing. It
gives to a person a direct and immediate juridical power over a
5. Traditio Constitutum Possessorium – consists in the
thing, which is exercised against the whole world.
owner’s continuous possession of the property he had
• Personal right refers to power belonging to one
sold to another person and his present possession
person to demand of another, as a definite passive
thereof is no longer that of the owner but that of a
subject, the fulfillment of a prestation to give, to do or
lessee.
not to do.

6. Traditio by operation of law – consists in the delivery


Need for Tradition or Delivery
of thing by operation of law such as intestate
Since the time the obligation to deliver a determinate thing
succession.
arises, the creditor only has a personal right. He can only
demand that the debtor deliver such thing and its fruits. The
7. Quasi-traditio – consists in the delivery of an
delivery or tradition of a thing is an essential requisite for the
incorporeal property.
purpose of acquiring ownership. The ownership of things is
transferred not by mere agreements but by delivery.
Remedy
When there is no delivery, he or she can file for a complain to
The creditor has a right to the fruits of thing from the time to
Specific Performance and Delivery because he is not yet the
deliver it arises. Fruits referred involve only determinate things.
owner.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 21

ARTICLE 1165 ARTICLE 1167


When what is to be delivered is a determinate thing, the If a person obliged to do something fails to do it, the same
creditor, in addition to the right granted him by Article 1170, shall be executed at his cost.
may compel the debtor to make the delivery.
This same rule shall be observed if he does it in
If the thing is indeterminate or generic, he may ask that contravention of the tenor of the obligation. Furthermore, it
obligation to be complied with at the expense of the debtor. may be decreed that what has been poorly done be undone.

If the obligor delays, or has promised to deliver the same Coverage of the Article
thing to two or more persons who do not have the same 1. Obligor fails to do an obligation required.
interest, he shall be responsible for any fortuitous event 2. Fulfilled the obligation in contravention of agreement.
until he has effected the delivery.
3. Fulfillment was done but poor or inadequate.
If any of such happens, the creditor entitled to have the
Obligation to Deliver Remedy
prestation done in a proper manner by himself or by a third
Determinate or specific Creditor may compel debtor
person, is at the expense of the debtor.
to deliver
Indeterminate or generic Creditor may ask for the
NOTE: But if the obligation can only be done by the debtor
compliance at the expense
himself, the only recourse available is a claim for damages since
of the debtor
it is against the constitution to force the debtor to perform the
obligation under involuntary servitude.
Remedies of the Creditor when Debtor Fails to Comply
a. Demand for specific performance even if the thing to ARTICLE 1168
be delivered is indeterminate. When the obligation consists in not doing, and the obligor
b. Rescission of the obligation. does what has been forbidden him, it shall also be undone at
c. Resolution of the contract if reciprocal obligation. his expense.
d. Damages exclusively or in addition.
Doing Prohibited Thing, Remedy
GENERAL RULE: Obligation to deliver a specific thing is Aside from undoing what is done in violation to the obligation,
extinguished by fortuitous event but not generic. he can be held liable for damages. There are times that the
thing cannot be undone thus indemnification is the only
EXCEPTION: He shall still responsible despite fortuitous event: remedy left for the creditor.
1. If obligor delays or in default;
2. If obligor is guilty of bad faith. ARTICLE 1169
Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially
ARTICLE 1166
demands from them the fulfillment of their obligation.
The obligation to give a determinate thing includes that of
delivering all its accessions and accessories, even though
However, the demand by the creditor shall not be necessary
they may not have been mentioned.
in order that delay may exist:
(1) When the obligation or the law expressly so declare;
What to Deliver
or
Everything that is attached, naturally or artificially, to the (2) When from the nature and the circumstances of the
principal thing, as well as that which serves to complete it, even obligation it appears that the designation of the
if not attached to it, must be delivered together with it. time when the thing is to be delivered or the service
is to be rendered was a controlling motive for the
Accessories establishment of the contract; or
Things which are united or attached as ornaments to the (3) When demand would be useless, as when the
obligor has rendered it beyond his power to
principal thing, or for the latter’s use or perfection. It is destined
perform.
for the embellishment, use, or preservation of another thing of
more importance like keys. In reciprocal obligations, neither party incurs in delay if the
other does not comply or is not ready to comply in a proper
Accession manner with what is incumbent upon him. From the moment
Everything produced by a thing, or which is incorporated or one of the parties fulfills his obligation, delay by the other
attached thereto, either naturally or artificially. It covers: begins.
• Accession discreta – right to the fruits
Concept and Nature of Delay
• Accession continua – which includes:
This is synonymous to default or mora which means delay in
o Accession natural – alluvion or deposits
the fulfillment of obligations. It is non-fulfillment with respect
o Accession industrial – building or planting.
to time. To be in default however, is different from mere delay
because it involves the beginning of a special condition which
Contrary Stipulation, Possible
has effects. Not applicable to negative obligations.
The parties may agree to exclude any accession or accessory of
the thing to be delivered.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 22

Delay happens when there is non-fulfillment of the obligation b. Debtor is exempted from the risks of loss of the thing,
after a judicial or extra-judicial demand. It is different from which automatically pass to the creditor.
default because ordinary delay is the mere failure to perform c. All expenses incurred by the debtor for the
an obligation at an appointed time. There is a need for a preservation of the thing after the mora shall be
demand either judicial or extrajudicial. chargeable to the creditor.
d. The creditor may relieve himself from the obligation
Instances when Demand is not needed by consignation of the thing.
1. Express stipulation
2. The law provides Consignation is the act of depositing of thing due with the
3. Time or period is the controlling motive or the court ow with judicial authorities whenever the creditor cannot
principal inducement for the creation of the accept or refuses to accept payment.
obligation.
4. Demand would be useless COMPENSATIO MORAE
5. Obligor admits he is in delay Applies only in reciprocal obligation. Where the parties are both
guilty of mora or mutual default, the default of one
When the time for the fulfillment of the obligation is fixed, no compensates of another. Delay beings when one party fulfills his
further demand is necessary. In case of doubt, in favor of the obligation. When the other party does not fulfill his obligation
debtor. he releases the other from his obligation. Usually, the fulfillment
should be simultaneous, unless the contrary is provided.
Kinds of Delay
1. Mora solvendi – default on the part of the debtor Cessation of the Effects of Delay
which may either be ex re or ex persona. 1. Renunciation by the creditor which can be implied or
2. Mora accipiendi – default on the part of the creditor. expressed like grant of extension of time or novation.
3. Compensatio morae – default on the part of both 2. Prescription.
parties in reciprocal obligations.
ARTICLE 1170
MORA SOLVENDI Those who in the performance of their obligations are guilty
a. The obligation pertains to the debtor or obligor of fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.
b. Determinate or liquidate, due and demandable
c. Not performed on maturity date
Grounds for Liability
d. Demand was made by creditor for the fulfillment of
These grounds are only for the rescission or for damages not
the obligation
grounds to nullify the contract:
1. Fraud – deliberate or intentional evasion of the
NOTE: Not applicable to natural and negative obligations.
normal fulfillment of obligation. It is the fraud at the
EFFECTS: (1) liable for damages or interest; (2) equitable
performance of the obligation not in the contract. It
mitigation if the loss occurred even if no default.
implies bad faith.

MORA ACCIPIENDI
2. Negligence – also known as culpa contractual or
This is the delay in the performance of the obligation based on
omission of the diligence required by the nature of the
the omission by the creditor of the necessary cooperation,
obligation and commensurate with the demands of
especially in acceptance in his part.
the subsisting circumstances. The negligence should
be of proximate cause not remote.
It is necessary that it be lawful for the debtor to perform, and
that he can perform. The creditor incurs delay when the debtor
3. Delay or Default – every debtor who fails in the
tenders payment of performance but the creditor refuses to
performance of his obligation is bound to indemnify
accept it without just cause.
for the losses and damages caused thereby, generally.

Requisites for Mora Accipiendi


4. Violation – contravening the tenor or term or
1. An offer or performance by the debtor who has
conditions of the contract.
required capacity.
2. The offer must be to comply with the obligation as it ARTICLE 1171
should be performed. Responsibility arising from fraud is demandable in all
3. The creditor refuses the performance without just obligations. Any waiver of an action for future fraud is void.
cause.
Prohibited Renunciation
Consequences To permit such advance renunciations would practically leave
a. Responsibility of the debtor for the thing is reduced the obligation without effect. The fraud referred is that which is
and limited to fraud and gross negligence. in bad faith in the performance of the obligation not in the
contract itself.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 23

ARTICLE 1172 Elements of Fortuitous Events


Responsibility arising from negligence in the performance of 1. The cause of the unforeseen and unexpected
every kind of obligation is also demandable, but such occurrence, or the failure of the debtor to comply with
liability may be regulated by the courts, according to the
his obligations must be independent of the human will
circumstances.
or the debtor’s will.
2. It must be impossible to foresee the event which
Kinds of Culpa
constitute the case caso fortuito, or if it can be
1. Culpa contractual – breach of contract
foreseen it was impossible to avoid.
2. Culpa aquiliana – civil negligence, tort or quasi-delict
3. Occurrence must be of such as to render it impossible
3. Culpa criminal – criminal negligence resulting to crime
for the debtor to fulfill the obligation in a normal
manner.
Culpa Culpa Culpa
4. The obligor must be free from any participation in, or
Contractual Aquiliana Criminal
aggravation of, the injury resulting to the creditr.
Negligence is Negligence is Negligence is
incidental direct, direct and
Additional Exceptions:
substantive and substantive
4. Obligor is already in delay
independent
5. Promised the same thing to two or more persons who
There is a pre- No pre-existing No pre-existing
do not have the same interest
existing obligation obligation except
6. Possessor is in bad faith
obligation not to harm
7. Obligor contributed to the loss of the thing
Preponderance of Preponderance of Guilty beyond
8. Guilty of fraud, negligence or delay or if he
evidence evidence reasonable doubt
contravened the tenor of the obligation.
Master-servant Defense of a Employer’s guilt –
rule good father civil liability
Doctrine of Created Risk
Existing contract Proof of Presumption of Assumption of risk is there when the nature of the obligation
negligence innocence so requires.

ARTICLE 1173 ARTICLE 1175


The fault or negligence of the obligor consists in the omission Usurious transactions shall be governed by special laws.
of that diligence which is required by the nature of the
obligation and corresponds with the circumstances of the
persons, of the time and of the place. When negligence shows Usury is contracting for or receiving something in excess of the
bad faith, the provisions of Articles 1171 and 2201, amount allowed by law for the loan or forbearance of money,
paragraph 2, shall apply. goods or chattels. It is the taking of more interest for the use of
money, goods or chattels than the law allows.
If the law or contract does not state the diligence which is to
be observed in the performance, that which is expected of a ARTICLE 1176
good father of a family shall be required. The receipt of the principal by the creditor without
reservation with respect to the interest, shall give rise to the
Diligence Required presumption that said interest has been paid.
1. Agreed upon by the parties
2. Required by law The receipt of a later installment of a debt without
reservation as to prior installments, shall likewise raise the
3. Expected of a good father of the family
presumption that such installments have been paid.
ARTICLE 1174
ARTICLE 1177
Except in cases expressly specified by the law, or when it is
The creditors, after having pursued the property in
otherwise declared by stipulation, or when the nature of the
possession of the debtor to satisfy their claims, may exercise
obligation requires the assumption of risk, no person shall
all the rights and bring all the actions of the latter for the
be responsible for those events which could not be foreseen,
same purpose, save those which are inherent in his person;
or which, though foreseen, were inevitable.
they may also impugn the acts which the debtor may have
done to defraud them.
Fortuitous Event
As a general rule, fortuitous events absolve obligor from the Rights of Creditors
liability. Applicable only to determinate things in case of The following are what the creditors are able to exercise in cases
obligations ex re. In generic things, the obligor can just ask. when there is a problem with the obligation performance:
1. Exact payments
EXCEPTIONS to Article 1174: 2. Exhaust debtor’s properties generally by attachment;
1. When the law so provides 3. Subrogatory action
2. Expressly stipulated by the parties 4. Impugn or rescind acts or contracts done by debtor to
3. When the nature of the obligation requires the defraud them.
assumption of risk.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 24

Courses of Action
1. Levy by execution or attachment.
2. Accion subrogatoria – here the creditor may go after
the debtors of the defendant-debtor. The creditor
merely steps into the position of the defendant debtor
to collect the valid and demandable credit.
3. Acction pauliana – rescission of contract in cases of
fraud by the debtor

ARTICLE 1178
Subject to the laws, all rights acquired in virtue of an
obligation are transmissible, if there has been no stipulation
to the contrary.

GENERAL RULE: All rights acquired in virtue of an obligation


are transmissible.

EXCEPTIONS:
1. If law provides otherwise;
2. If contract provides otherwise;
3. If obligation is purely personal
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 25

OBLIGATIONS AND CONTRACTS Although it may appear that the sale is merely verbal, and
Articles 1156-1178 payment therefore was to be made on instalment, it is a
partially consummated sale, with Badillas paying the initial
JURISPRUDENCE NOTES
purchase price and Ledesma surrendering possession.
• Ledesma delivered the owner’s duplicate of OCT.
Article 1164. – Right of Creditor to the Fruits;
Acquisition of Real Right
Delivery of the Property Transfers Ownership
The ownership of the things sold is transferred to the vendee
BADILLA v. BRAGAT (2015)
upon the actual or constructive delivery of the same. The thing is
understood to be delivered when it is placed in the control and
Facts: Spouses Pastrano were the original owners of Lot 19986
possession of the vendee.
in Cagayan de Oro City. Consisting of 1015 sq.m. the OCT for
• Payment of purchase price is not essential to the
the lo was issued in 1980. Allegedly, before the issuance of the
transfer of ownership as long as the property has been
OCT, in 1968 the Spouses sold the land to Ledesma by a Deed
delivered and such divests the vendor of title to the
of Definite Sale of Unregistered Coconut and Residential Land.
property which may not be regained unless the
contract is resolved or rescinded.
The Spouses Badilla claimed that in 1970 Ledesma sold to the
in an installment basis a portion of 200 sq.m. of the subject
The same is true even if sale is verbal. When a verbal contract
property. The sale was not reduced into writing, but the
has been completed, executed or partially consummated, its
possession of the portion sold was transferred to the Badillas,
enforceability will not be barred by Statute of Frauds.
designated as Lot 19986-B.
• Thus, when a party has performed his obligation, oral
evidence will be admitted proving the agreement.
In 1978, the Spouses Bragat brought 991 sq.m. of the property
• Where it was proven that one party had delivered the
from Ledesma and his wife via a Deed of Absolute Sale of a
thing sold to another, then the contract was partially
Residential Lot. Two tax declarations were allegedly issued as a
executed, and Statute of Frauds does not apply.
result of the sale.
In the case: The Spouses Badilla owning the 152 sq.m. since
In 1984, the Spouses Pastrano executed another Deed of
1970 shows that the TCT in favor of Bragat was wrongfully
Absolute Sale of Registered Land in favor of Fe Bragat. On the
issued. The deed of sale executed between Pastrano and Bragat
same date, Pastrano executed an Affidavit of Loss reporting of
is void for being simulated since both know that at the time of
the loss of the owner’s copy of the OCT.
execution the vendor’s lack of ownership.
• Bragat knew this, as they first bought the property
1987 – another deed of sale for Bragat, thus a TCT was now
from Ledesma through a deed of sale in 1978.
issued in favor of Bragat. In 1991, Bragat made a written
• Pastrano (wife) was already dead when it was
demand to vacate against the Spouses Badilla.
executed. Bragat cannot be in good faith
• Naturally the Badillas raise the earlier sale made by
• It is from this sale Fe Bragat derives title on the
Pastrano to Ledesma and by the latter to them.
property. Pastrano has no right to sell any. No one can
give what one does not have.
Bragat’s contentions: She claimed to have purchased the
• The property bought by Bragat from Ledesma does
property, first, from Ledesma but when she found out that
not include the 152 sq.m. bought by the Badillas.
Ledesma was unauthorized to sell, she made another purchase
from the Pastrano thus the issuance of the TCT.
Held: Fe Bragat is entitled to a new TCT but based on the Deed
of Sale with Ledesma on 1987, excluding the 152 sq.m. already
RTC. It found that Bragat’s title as valid as purchaser in good
bought by the Badillas. Petition granted. CA reversed. TCT void.
faith and for value. There was also lack of evidence from the
Spouses Badilla. The receipts were not absolute ownership. CA
Article 1169. – Principle of Delay
affirmed the decision.

LEAÑO v. COURT OF APPEALS (2001)


Who owns the subject property?

Facts: On 1985, Fernando as vendor and Leano as vendee,


Discussion: The error of the courts is in misapprehending the
executed a contract to sell involving Lot No. 876-B with an area
fact that ownership passed to the Spouses Badilla upon their
of 431 sq.m. in Bulacan. She bound herself to pay Fernando the
purchase of the subject property from Ledesma.
sum of P107,750 as the total purchase price of the lot with
downpayment and monthly amortization for ten years with an
It is not disputed that the spouses Pastrano has previously sold
interest of 18% per annum based on balances.
in November 1968 via deed of Definite Sale of Unregistered
Coconut and Residential Land to Eustaquio Ledesma. As early as
It provides grace period of one month to make the payment,
such date Pastranos no longer had ownership on property. In
and should it expire without installment the interest shall be
the 1970 sale by Ledesma, the Spouses Padilla immediately
charged on such unpaid installments.
took delivery and possession.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 26

Should a period of 90 days elapse from the expiration of the The decision in the ejectment case operated as the notice of
grace period without the overdue and unpaid installment cancellation. As petitioner was not given the cash surrender
having been paid with the corresponding interests, the vendor value of the payments that she made, there was still no actual
is authorized to declare the contract cancelled. The payments cancellation of the contract.
shall be considered as rents paid for the use an occupation. • Should she wish to reinstate the contract she would
have to update her accounts with accordance to the
In 1991, Fernando filed for an ejectment case, and the MTC SOA which is P182,687.
granted such. Petitioner filed with RTC for injunction and
assailed the validity of the judgment for being violative of her On the Issue of Delay of Payment of Amortizations
right to due process. While the contract provided that the total purchase price was
• Trial court held that the contract was an absolute and payable within a ten-year period, the same contract specified
the delivery divested and awarded ownership thus she that the purchase price shall be paid in monthly installments for
cannot be evicted. which the corresponding penalty shall be imposed in case of
default. Petitioner cannot ignore the provision on monthly
Was the transaction an absolute sale? payment of amortizations.
Was the cancellation of such proper?
Was the petitioner in delay of payment of amortizations? Article 1169 of the Civil Code provides that in reciprocal
obligations, neither party incurs in delay if the other does not
Discussion: comply or is not ready to comply in a proper manner with what
Contract to Sell, Ownership and Possession is incumbent upon him. From the moment one of the parties
The transaction was a conditional sale the intention of the fulfills his obligation, delay by the other begins.
parties was the reserve the ownership of the land in the seller
until the buyer has paid the total purchase price. A contract to In the case: Fernando performed his part by allowing petitioner
sell is subject to conditions. to possess and use the property. Cleary, when she did not pay
the monthly amortization in accordance with the terms of the
What was transferred was possession not ownership. The contract, she was in delay and liable for damages.
possession is even limited by the following: • The court finds that interest and surcharges are
(1) Vendee may continue therewith if the vendee sufficient compensation for such.
complies with all the terms and conditions.
(2) Buyer may not sell, cede, assign, transfer or mortgage HEIRS OF BACUS v. COURT OF APPEALS (2001)
or in any way encumber any right, interest, or equity
that she may have or acquire over such land. Facts: On June 1, 1984, Bacus leased to private respondent
The registration shall be done complete payment of the total Duray a parcel of agricultural land in Cebu. The lease was for six
purchase price of the property with the stipulated interest. years. The contract contained an option to buy clause. Under
such, the lessee had the exclusive and irrevocable right to buy
In a contract to sell real property in installments, the full 2000 sq.m. of the property within five years priced a P200 per
payment of the purchase price is a positive suspensive square meter adjustable by US-Peso rate.
condition the failure of which is not considered a breach but
simply an event that prevented an obligation of the vendor to Close to the expiration of the contract Luis Bacs died in 1989.
convey title from acquiring any obligatory force. Upon full In 1990, the lessor Duray spouses were now willing and ready
payment ownership and title is transferred. to purchase the property under the option to buy clause. In
March of 1990, due to the refusal of petitioners to sell. In April
In the case: Petitioner’s nonpayment of the installment after 1990 he filed a complaint to the Lupon for specific performance
1989 prevented the obligation of Fernando to convey the of allowing him to purchase the lot under the option to buy
property from arising. It even brought into effect the provision clause. In turn, the petitioners then asked for full payment, the
of the contract on cancellation. respondents refused. RTC ruled in favor of Duray. CA affirmed.

RA 6552 provides the right of the seller to cancel the contract Can the petitioners not be compelled to sell the disputed
upon non-payment of an installment by the buyer, which could property by nonfulfillment of the obligation under the option
have only been an event which prevented the fulfillment of the contract of the respondents?
obligation. It reads:
“If the contract is cancelled, the seller shall refund to the buyer the cash Discussion:
surrender value of the payments on the property equivalent to fifty Obligations of Option to Buy are Reciprocal Obligations
percent of the total payments made and, after five years of installments, Private respondent’s bank certificate stating the arrangement
an additional five percent every year but no to exceed ninety percent of
were now being made by the bank cannot be considered as
the total payments made: Provided, That the actual cancellation of
legal tender that may substitute for delivery of payment to
contract shall take place after thirty days from receipt by the buyer of
the notice of cancellation or the demand for rescission of the contract petitioners not was it a consignation. As a reciprocal obligation,
by a notarial act and upon full payment of the cash surrender value to the performance of one obligation is conditioned on the
the buyer.” simultaneous fulfillment of the other obligation.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 27

In an option to buy, the payment of the purchase price by the Megaworld attributed the delay to the 1997 Asian financial
creditor is contingent upon the execution and delivery of a crisis which was beyond its control, and argued that default had
deed of sale by the debtor. not set in, Tanseco not having made any judicial or extrajudicial
demand for delivery before receipt of the notice of turnover.
In this case: When private respondents opted to but the
property, their obligation was to advise petitioners of their HLURB Arbiter dismissed Tanseco’s complaint. Upon appeal to
decisions and their readiness to make actual payment. Only the HLURB-BOC, it sustained the decision. MR was denied.
upon petitioners’ actual execution and delivery of deed of sale Upon appeal to the OP her petition was still denied. Thus, the
where they required to pay. recourse to the Court of Appeals.
• Notice of creditor’s decision of his option to buy need
not be coupled with actual payment of the price, so long CA granted her appeal by rescinding the contract and ordering
as this is delivered to the owner of the property upon Megaworld to pay the amount and the damages. Using Article
performance of his party of the agreement. 1169 of the Civil Code, no demand is needed when the
obligation to demand is needed when the date is stated.
Consignation is the act of depositing the thing due with the
court whenever the creditor cannot accept or refuses to accept Contract to Buy and Sell; Reciprocal Obligations
payment and it general requires a prior tender of payment. The obligations are to complete and deliver the unit before
• The petitioner’s argument that the respondents failed October 31, 1998 or within the grace period, and for Tanseco
to comply to deliver the purchase price or consign it to pay the balance of the purchase price. Compliance by
has no legal basis to stand on. Megaworld with obligation is determinative of compliance by
Tanseco of payment of balance. Megaworld is liable therefor.
Delay in Reciprocal Obligations
Article 1169 provides that in reciprocal obligations neither party The notice of turnover preceded demand for refund did not
incurs delay if the other does not comply or is not ready to abate her cause. Demand would have been useless, the
comply in a proper manner with what is incumbent upon him. creditor failed in its obligation to deliver the unit on the
Only from the moment one of the parties fulfills is obligation, agreed date.
does delay by the other begin.
On Financial Crisis: The court cannot generalize the 1997
In the case: Respondents as early as March 1990 Asian financial crises to be unforeseeable and beyond the
communicated to the petitioners the intention to buy the control of a business corporation. A real estate enterprise
property and they were at that time undertaking to meet their engaged in the pre-selling of condominium units is concededly
obligation. However, petitioners refused to execute the deed of a master in projections on commodities and currency
sale and it was their demand that the respondent deliver first movements, as well as business risks. The fluctuating
the money before execution of the deed of sale. movement of the Philippine peso in the foreign exchange
market is an everyday occurrence, hence, not an instance of
On October 1990, the respondents issued a cashier’s check in caso fortuito. Megaworld excuse for its delay does not thus lie.
petitioners favor to bolster their claim that they were ready to
pay the purchase price. Accordingly, as there was no On Laches: It bears noting that Tanseco religiously paid all the
compliance yet to any of the parties’ delay has not set in even installments due up to January 1998, whereas Megaworld
after the expiration of contract. reneged on its obligation to deliver within the stipulated period.
A circumspect weighing of equitable considerations thus tilts
MEGAWORLD v. TANSECO (2009) the scale of justice in favor of Tanseco.

Facts: In 1995, Megaworld Inc. and Tanseco entered into a Held: Tanseco is entitled to be reimbursed the total amount
Contract of Buy and Sell of a 224 sq.m. condominium unit at she paid Megaworld. Finally, since Article 1191 does not apply
a pre-selling project, the Salcedo Park along Makati City. The to a contract to buy and sell, cancellation, not rescission, of the
purchase price was P16,802,037.32. contract is thus the correct remedy in the premises.

In the contract, the schedule provides that the unit shall be GENERAL MILLING CORP. v. RAMOS (2011)
completed and delivered not later than October 31, 1998 with
additional grace period of six months. Tanseco then paid all Facts: General Milling Corporation entered into a Growers
installment due up to January, 1998, leaving unpaid the balance Contract with spouses Ramos. GMC was to supply broiler
of P2,520,305.63 pending delivery of the unit. However, chickens for the spouses. To guarantee full compliance, the
Megaworld failed to deliver the unit within the stipulated Growers Contract was accompanied by a Deed of Real Estate
period even within the grace period. Mortgage over a piece of real property upon which their
conjugal home was built. The spouses further agreed to put up
Three years later, Tanseco was informed that the unit was ready a surety bond at the rate of PhP 20,000 per 1,000 chicks
for inspection and delivery. Tanseco replied that in view of delivered by GMC.
Megaworld’s failure to deliver on time, demanded return.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 28

Spouses Ramos eventually were unable to settle their account Whether or not a Joint Affidavit of Undertaking is a contract
with GMC. They alleged that they suffered business losses that can be the basis of obligation to pay sum of money and
because of the negligence of GMC and its violation of the that there was no prior demand to the debtors.
Growers Contract. GMC notified of an institution of the
foreclosure proceedings on mortgaged property. Affidavit is in the Characteristic of a Contract
Contracts are obligatory no matter what their forms may be,
It was foreclosed for PhP 935,882,075, an amount representing whenever the essential requisites for their validity are present.
the losses on chicks and feeds exclusive of interest at 12% per The court looks beyond the title for it is not conclusive of the
annum and attorney’s fees. Spouses Ramos filed a Complaint nature of its contents.
for Annulment and/or Declaration of Nullity of the Extrajudicial • Intent of the parties is primordial and is to be pursued.
Foreclosure Sale with Damages. They contended that the If the terms are clear the literal meaning should
extrajudicial foreclosure sale on June 10, 1997 was null and control. If contrary to intention, the words shall not
void, since there was no compliance with the requirements of control over the contract.
posting and publication of notices.
In this case: A simple reading of the terms of the Joint Affidavit
Was there sufficient demand? of Undertaking readily discloses that it contains stipulations
characteristic of a contract. A stipulation where petitioners
Requisites of a Demand promised to replace the damaged car within 20 days of the
GMC asserts error on the part of the CA in finding that no same model and least of same quality. If they would not be able
demand was made on Spouses Ramos to pay their obligation. to replace, they would pay the cost in the total amount of
On the contrary, it claims that its March 31, 1997 letter is akin P350,000 subject to 12% per month for any delayed payment
to a demand. There are three requisites necessary for default: after the 20-day period on November 15, 1999. These are
1. Obligation is demandable and liquidated simple terms that the petitioners could understand.
2. Debtor delays performance
3. Creditor judicially or extrajudicially requires the On vitiated consent. An allegation of vitiated consent must be
debtor’s performance, unless contrary is agreed. proven by preponderance of evidence. Although the
undertaking appears to be onerous and lopsided, this does not
In the case: GMC did not make a demand on Spouses Ramos necessarily prove the vitiation of consent.
but merely requested them to go to GMCs office to discuss the • They in fact admitted the genuineness and due
settlement of their account. execution when they said they have signed such to
secure possession of the mini bus.
Held: There was no default yet, foreclosure is improperly based • They may have given it grudgingly, but it is not
upon such. Despite the lack of demand made on the spouses, indicative that is a ground for the annulment of the
however, GMC proceeded with the foreclosure proceedings. contract.
Neither was there any provision in the Deed of Real Estate
Mortgage allowing GMC to extrajudicially foreclose the Demand, Default and Interest Rate
mortgage without need of demand. GMC should have first In the absence of the demand prior to the filing of the
made a demand on the spouses before proceeding to complaint, the interest cannot be computed from November
foreclose the real estate mortgage. 15, 1999 until a demand has been made for the debtors would
not have been said to be in default. Default generally begins
CRUZ v. GRUSPE (2013) from the moment the creditor demands the performance of the
obligation.
Facts: Arose from an accident last October 1999 when the mini • Demand could be considered to have been made
bus owned and operated by Cruz driven by Davin collided with upon the filing of the complaint in November 19,
the Toyota Corolla car of Gruspe. The latter’s car was a total 1999 and it is from this date interest be computed.
wreck. Cruz went to Gruspe’s office and apologized and they
executed a Joint Affidavit of Undertaking promising jointly Article 1174. Doctrine of Fortuitous Event
and severally to replace the damaged car in 20 days or until
November 15, 1999 of the same model and least the same PHILIPPINE AIRLINES v. CA (1993)
quality or pay P350,000 with and interest of 12% per month for
any delayed payment. Cruz failed to fulfill the obligation. Facts: On November 1976, private respondent filed a complain
for damages for breach of contract of carriage against PAL. On
Cruz claimed that Gruspe. A lawyer, prepared such instrument August 2, 1976 he was among the 21 passenger of Flight 477
and forced them to affix their signatures thereon without that took off from Cebu for Ozamiz.
explaining or informing them of its contents. He only affixed his
signature to have his mini bus released as it was his only means While on flight about fifteen minutes before landing, the pilot
of income. Gruspe sold the wrecked car for P130,000. RTC ruled received a radio message that the airport was closed due to
in favor of Gruspe and CA affirmed the decision. Cruz and heavy rains and inclement weather and should proceed to
Leonardo failed to present evidence for vitiated consent. Cotabato instead.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 29

Upon arrival in Cotabato City, PAL informed the passengers of On Inattention. The records are bereft of evidence to support
their options to return to Cebu on Flight 560 on the same day the same, thus the ruling of CA has no basis. The private
and to Ozamis on August 4, 1976 or take the next flight to Cebu respondent was attended by the PAL and by its Manager.
on 3 and arrive at Ozamis at 5. From Flight 560 there were only
six seats left and the priority is based on check-in sequence. Held: Moral damages reduced from P50,000 to P10,000 and
exemplary is reduced to P5,000. About actual damages, the
He was passenger No. 9. He insisted on being given priority but same is unwarranted it must be based on evidence and
refused for the predicament was due to force majeure not of competent proof.
PAL’s own doing. He tried to stop flight due to some packages
till on board. PAL issued a free ticket to Iligan which he received SOUTHEASTERN COLLEGES v. CA (1998)
under protest. He was left in the airport with no food and
accommodation for his stay in Cotabato. In Iligan City, private Facts: De Jesus are owners of a house at Pasay, while petitioner
respondent hired a car from the airport to Ozamis City and his owns a four-floor school building along the same College road.
personal effects were no longer recovered. On October 11, 1989 at 6:30AM typhoon Saling hit Manila.
Buffeted by strong winds, the roof of the petitioner’s building
PAL answered denying its unjust refusal to accommodate ripped and blown away lading on and destroying portions of
respondent. It argued that the first six passengers chose to take the roofing of the house of the private respondent.
Flight 560 and it was explained of the inability to transport all
of them back to Cebu and it was only the private respondent After an investigation, it was recommended that the school
who insisted on such. Runway was wet and a danger to life. RTC building was to be declared as a structural hazard duet to a
decided in favor of PAL and CA affirmed such. defective roofing structure and could have been avoided if the
construction was not faulty.
Does PAL’s indifference and inattention to his predicament a
basis for award or moral and actual damages due to In a complaint for culpa aquiliana, it was alleged that the
negligence? damage to their house render it inhabitable, forcing them to
stay in other houses. In their Answer, it stated that the school
Contract of Air Carriage did its best to have in good condition and that the typhoon is
Being imbued with public interest, the law requires common beyond human control thus absent negligence. RTC favored the
carriers to carry the passengers safely as far as human care and private respondents. CA affirmed but reduced the damages.
foresight can provide, using utmost diligence of very cautious
persons, with due regard for all circumstances (Article 1755). Whether the damage on the roof of the building of private
respondents resulting from the impact of the falling roof the
In the case: The diversion of flight was due to an inclement school building by Saling due to fortuitous event?
weather which was a fortuitous event. Such occurrence
nonetheless did not terminate PAL’s contract with its Fortuitous Event, Concept and Application
passengers. Being in the business of air carriage, PAL is It is defined as an event which takes place by accident and could
deemed equipped to deal with situations as this case. have not been foreseen or resisted. It is produced by two
• The relation of carrier and passenger continues until the general causes according to Tolentino:
latter has been landed at the port of destination and 1. By nature – earthquakes, storms, floods.
has left the carrier’s premises. 2. By act of man – armed invasion, bandits, robbery

PAL necessarily would still have to exercise extraordinary In order that a fortuitous even may exempt a person from
diligence in safeguarding the comfort, convenience and safety liability, it is necessary that he be free from any previous
of its stranded passengers until they have reached their negligence or misconduct by reason of which the loss may
destination. PAL grossly failed considering that there was an have been occasioned. An act of God cannot be invoked for
ongoing battle between rebels and government forces in the protection of a person who has been guilty of gross
Cotabato and respondent was a stranger. negligence in not trying to forestall its adverse consequence.
• When negligence concurs with an act of God
On Non-Accommodation. While PAL was remiss in its duty of producing damage or injury to another, such person
extending utmost care to private respondent while being is not exempt from liability by showing that the
stranded in Cotabato City there is no sufficient basis that PAL immediate or proximate cause was the event.
failed to inform him of the non-accommodation. • When the effect is found to be partly the result of the
• Insistence was unreasonable considering that participation of man, the whole occurrence is hereby
fortuitous event and that there was a sequence to be humanized, removed from the ambit of Acts of God.
observed in the booking. His intransigence was the
main cause for his having to stay at the airport for In the case: There is no question that a typhoon is a fortuitous
longer than was necessary. event which may be foreseen but is somehow unavoidable. The
person claiming negligence has the burden of proof proving
such by competent evidence not merely presumptions.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 30

They merely relied on the report made by the team which made Globe answered that it was constrained to end the Agreement
an ocular inspection. As the term imparts, it is one by mean of due to the termination of the Senate of the Treaty which
actual sight or viewing. What is visual to the eye is not always allegedly constituted ‘force majeure’ under the Agreement and
reflection of the real cause behind. such exempted it from paying rentals.

Other than ocular inspection, there is no investigation Is the termination of the RP-US Agreement constitutive of force
conducted to determine the real cause of the partial unroofing majeure that would exempt obligation to perform payment?
and did not show that the building’s design was deficient, or
the construction was flawed. Petitioner obtained both building Force Majeure, Coverage and Application
permit and certificate of occupancy which are prima facie Article 1174 of the Civil Code exempts the obligor from liability
evidence of regular and proper construction. because fortuitous event or force majeure, which refers to
• Structurally defective finding – is of unqualified events that are unforeseeable, but also those which are
imprimatur for the city building official presumed to foreseeable but inevitable. Not being contrary to law, Section
have been regularly performed his duties allowed 8 of the Agreement has force of law between them.
repairs of such with the same design, implying no
structural defects. Requisites to exempt Globe from non-compliance:
• Annual maintenance inspection reports were (1) Event must be independent of human will
presented by the vice president for finance and (2) Occurrence must render it impossible for the debtor
administration. to fulfill the obligation in a normal manner
(3) That the obligor must be free of participation in or
Held: We find no clear and convincing evidence to affirm the aggravation of, the injury to the creditor.
judgment of CA. The petition has not been shown to be
negligent or a fault regarding the construction and In the case: The following are present in the instant case. Both
maintenance of tis school building. The claim for damages must parties do not have control over the non-renewal of the
fail more so because no bad faith or even willful act to cause agreement because the prerogative to ratify thereof belonged
damage was alleged and proven. to the Senate. Neither did they have control over withdrawal.
• The events made it impossible the continuation of the
PHILCOMSAT v. GLOBE (2004) five-year terms without fault on either party.
• It would be unjust for Globe to continue paying
Facts: For several years prior to 1991, Globe Telecom had been rentals.
engaged in the coordination of the provision of various
communication facilities for the military bases of US. They were On December 1992 Payment. Philcomsat could not have
configured for the exclusive use of US Defense removed or rendered ineffective said communication until after
Communications Agency. USDCA contracted with Globe for the December 31, 1992 because the Cubi Point was accessible only
use of communication facilities. Globe, on the other hand, to US naval personnel that time. Thus, payment is due.
contracted with local service providers such as PHILCOMSAT for
the provision of communication facilities. GAISANO CAGAYAN v. INSURANCE COMPANY (2006)

May 07, 1991 Philcomsat and Globe entered into Agreement Facts: IMC is the maker of Wrangler Blue Jeans. Levi Strauss
whereby Philcomsat obligated itself to establish, operate and Phils. (LSPI) is the local distributor of products bearing
provide and IBS Standard B Earth Station for exclusive use of trademarks owned by LCI, IMC. LSPI obtained from respondent
the USDCA. Term was for 60 months or five years. Globe fire insurance policies with book debt endorsements. Petitioner
promised to pay Philcomsat monthly rentals for each leased is a customer and dealer of the products of IMC and LSPI. On
circuit involved. February 25,1991 the Gaisano Superstore Complex in CDO was
consumed by fire. Included in the items lost were stocks of
At the time of agreement, both parties knew of the RP-US ready-made clothing materials by IMC and LSPI.
Military Bases Agreement that it was to expire also on 1991.
Subsequently, they installed and established the earth station. On February 1992, respondent filed for damages against
On September 16, 1991 the senate decided not to concur on petitioner. It alleges that IMC and LSPI filed with respondents
the Treaty of Friendship that was supposed to extend. their claims under their respective fire insurance policies and
• Shall terminate on December 31, 1992. that petitioner has unpaid accounts and by virtue of such
respondent was subrogated to their rights against petitioner,
On August 06, 1992, Globe notified Philcomsat of its intention that respondent made several demands but unheeded.
to discontinue the use of the earth station on November 06,
1992 in view of the withdrawal of US Military Personnel. Globe Petitioner contends that it could not be held liable because the
invoked Section 8 on Default of the Agreement stipulating property covered by the insurance policies were destroyed due
about force majeure. to force majeure, right of subrogation has no basis. There was
• Philcomsat however demanded payment of no breach of contract for that there was no way the fire could
outstanding obligations under the Agreement. have been prevented or foreseen.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 31

RTC dismissed respondent’s complaint holding that fire was SICAM v. JORGE (2007)
purely accidental and that it was not attributable to the
negligence of the petitioner. CA set aside RTC, for the sales Facts: On October 19, 1987 two armed men entered the
invoice are proofs of sale and that the loss of the good in the pawnshop and took away whatever cash and jewelry were
fire must be borne by the petitioner for the thing lost by a found inside the vault. Petitioner Sicam sent Respondent Jorge
fortuitous event the risk is borne by the owner of thing by informing her of the loss of her jewelry due to the robbery
doctrine of res perit domino. incident in the pawnshop.

On the Insurance Policy. The questioned insurance policies Respondent Jorge then expressed her disbelief stating that
provide coverage for book debts about read-made clothing when the robbery happened, all jewelry pawned were
materials which have been sold or delivered to various deposited with Far East Bank near the pawnshop since it had
customers and dealers of the insured anywhere in the been the practice that before they would withdraw, advance
Philippines. Book debts is the unpaid account still appearing in notice must be given to the pawnshop, so it could withdraw the
the book account of the insured 45 days after the time of the jewelry from the bank. Thus, she requested withdrawal but
loss covered by the policy. Sicam failed to return such jewelry.
• Nowhere was it provided that the questioned
insurance policies that the subject of the insurance is RTC held that petitioner Sicam could not be made personally
the goods sold and delivered to the customers and liable for a claim arising out of a corporate transaction and that
dealers of the insured. the corporate debt or credit is not the debt or credit of a
• What were insured were the accounts of the IMC and stockholder. The loss was also due to an armed robbery which
LSPI with petitioner Gaisano which remained unpaid is considered as a fortuitous event.
45 days after the loss through fire and not the loss or
destruction of the goods delivered. CA reversed stating that the doctrine of piercing the veil of
corporate entity. Corresponding diligence required of a
On Risk of Loss. When the seller retains ownership only to pawnshop is that it should take steps to insure itself against the
ensure that the buyer will pay its debt, the risk of loss is borne loss of articles which are entrusted for custody. Sicam was
by the buyer. Petitioner bears the risk of the loss delivered. found also to be personally liable.
• In insurance, one’s interest is not determined by
concept of title but whether insured has substantial Piercing the Veil of Corporate Fiction
economic interest in the property. The rule is that the veil of corporate fiction may be pierce when
made as a shield to perpetrate fraud and/or confuse legitimate
Petitioner Bears the Loss of the Goods issues. The theory of corporate entity was not meant to
The argument that it is not liable due to force majeure is promote unfair objectives or otherwise shield them.
misplaced. It must be stressed that the insurance of this case
was not the loss of goods by fire but for the petitioner’s In the case: Respondent Lulu pawned her jewelry in a
account with IMC and LSPI that were remained unpaid 45 pawnshop owned by Sicam himself. All the receipts all bear the
days after the fire. The obligation is for payment of money. words Agencia de R.C. Sicam, notwithstanding its incorporation
• Where the obligation consists in the payment of money, on 1987. It was misleading that the pawnshop was owned solely
the failure of the debtor to make the payment even by by the petitioner Sicam and not by a corporation.
reason of fortuitous event shall not relieve liability.
• Fortuitous event only holds true when the obligation In view of the alleged incorporation of the pawnshop, the issue
consists in the delivery of a determinate thing. It does of whether petitioner Sicam is personally liable is inextricably
not apply when the obligation is pecuniary in nature, connected with the determination of the question whether the
doctrine should apply to the case.
Article 1263 in an obligation to deliver a generic thing, the loss
or destruction of such does not extinguish obligation. Genus of Are the petitioners exempted from liability since robbery is a
a thing can never perish. An obligation to pay money is generic, fortuitous event and they were not negligent?
therefore, it is not excused by force majeure.
• Where fire is force majeure or not are immaterial what Fortuitous Events and Requirement of Diligence
is relevant here is that whether petitioner has The burden of proving that the loss was due to a fortuitous
outstanding account to IMC and LSPI. event rests on him who invokes it. And, in order for a fortuitous
event to exempt one from liability, it is necessary that one has
On Subrogation. No proof of full settlement, no subrogation not committed negligence or misconduct that may have
receipt was offered in evidence. There is no evidence that occasioned the loss.
respondent has been subrogated to any right which LSPI may
have against petitioner. Subrogation occurs when an insurance An act of God cannot be invoked to protect a person who has
company which pays its insured client for injuries and losses failed to take steps to forestall the possible adverse
then sues the party which the injured person contends caused consequences of such a loss. One’s negligence may have
the damages to him/her. concurred and would not exempt liability.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 32

In the case: Sicam had testified that there was a security guard
in their pawnshop at the time of the robbery. And testified that
he intended to have a separate fault. But they failed to show
that they were free from any negligence.

Robbery Per Se is not a Fortuitous Event


It does not foreclose the possibility of negligence. The fact that
a thing was unlawfully and forcefully taken from another’s
rightful possession does not automatically give rise to a
fortuitous event. To be considered as such, it must be proved
and established that the event was an act of God or was done
solely by third person and that neither the claimant nor the
person alleged to be negligent has any participation.

In the case: Petitioners merely presented the police report of


the police station which is not sufficient to prove robbery and
does not show that they were not at fault.

On Diligence. Article 2209 provides that the creditor shall take


care of the thing pledge with the diligence of a good father of
a family. This means that petitioners must take care o the pawns
the way a prudent person would as to his own property.

In the case: A review of the records clearly shows that


petitioners failed to exercise reasonable care and caution that
an ordinarily prudent person would have used in the same
situation. Sicam’s testimony reveals that the vault was partly
open, and the combination was off.
• This reveals that there were no security measures
adopted by petitioners in the operation of the
pawnshop.
• No sufficient precaution and vigilance were adopted
by petitioners to protect the pawnshop from unlawful
intrusion.
• There was no clear showing that there was any security
at all. Or if there was one, that he had sufficient
training in securing a pawnshop. He was unable to
notice that the robbers were armed with pistols.
• The security guards were not presented at all to
corroborate Sicam’s claim. Not one of the petitioner’s
employee was present during the robbery incident.

Held: Preponderance of evidence shows that petitioners failed


to exercise the diligence required under Article 1173. The
diligence with which the law requires the individual at all times
to govern his conduct varies with the nature of the situation in
which he is placed and the importance of the act which he is to
perform.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 33

CHAPTER 3 Resolutory – its happening extinguishes the


DIFFERENT KINDS OF OBLIGATIONS obligation which is already existing or non-fulfillment
of the condition extinguishes existing obligation.
Classification of Obligations
The Civil Code classifies obligations primarily into: 2. Potestative – depends upon the will of the debtor
1. Pure Casual – depends on the chance/will of third person
2. Conditional Mixed – depends party on will and chance of the third
3. With a term person in the relation.
4. Alternative
5. Joint or mancommunada 3. Divisible – capable of partial fulfillment
6. Solidary or several or in solidum Indivisible – incapable of partial fulfillment
7. Divisible
8. Indivisible 4. Positive – an act is to be performed
9. With a Penal Clause Negative – something will be omitted

SECTION 1. – PURE AND CONDITIONAL OBLIGATIONS


5. Conjunctive – if all the conditions are performed
ARTICLE 1179 Alternative – if only a few of the conditions must be
Every obligation whose performance does not depend upon performed.
a future or uncertain event, or upon a past event unknown to
the parties, is demandable at once. ARTICLE 1180
When the debtor binds himself to pay when his means
Every obligation which contains a resolutory condition shall permit him to do so, the obligation shall be deemed to be one
also be demandable, without prejudice to the effects with a period, subject to the provisions of Article 1197.
happening the event.
Court to Fix Period
Pure Obligation This is when the payment does not depend on the will of the
It is an obligation which contains no term or condition whatever debtor for he binds himself to pay. The creditor should file an
upon which depends the fulfillment of the obligation action to enforce the obligation. The courts will fix the duration
contracted by the debtor, the obligation is a pure obligation. It of the period.
is immediately demandable and there is nothing to exempt the
debtor from compliance therewith. ARTICLE 1181
In conditional obligations, the acquisition of rights, as well as
Example. A promissory note stating that A promises to pay B on the extinguishment or loss of those already acquired, shall
depend upon the happening of the event which constitutes
a certain date, is held to be a pure obligation. This is because it
the condition.
was held to contain no term or condition whatever upon which
the fulfillment of the obligation contracted by the debtors was
Suspensive and Resolutory Conditions
made to depend and that there existed no motive or reason
• Suspensive Condition – if this happens, the obligation
that exempted them from compliance therewith.
arises, if it does not happen, the obligation does not
come into existence.
Instances when Obligation is Demandable at Once
1. When it is pure
• Resolutory Condition – if this happens, it extinguishes
2. When it has a resolutory condition
rights and obligations already existing. Also known as
condition subsequent.
Conditional Obligations
It is one that is subject to conditions. It is dependent upon the
ARTICLE 1182
terms and conditions that would affect legal relation. When the fulfillment of the condition depends upon the sole
will of the debtor, the conditional obligation shall be void. If
• Conditions – has been defined as every future and it depends upon chance or upon the will of a third person, the
uncertain event upon which an obligation or provision obligation shall take effect in conformity with the provisions
is made to depend. It is an event upon which the of this Code.
acquisition or resolution of rights is made to depend
by those who execute the juridical acts. Definitions and Examples
Potestative Condition – depends upon the will of the
• Term – that which necessarily must come whether the contracting parties. It is one which is in the power of one of the
parties know when it will happen or not. parties to realize or prevent.
Kinds of Conditions • I promise to give you P1,000 if you build a house for
1. Suspensive – its fulfillment gives rise to the me in three months.
obligation, also known as condition precedent. Casual Condition – depends exclusively upon chance or other
factors and not upon the will of the contracting parties. A
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 34

condition dependent upon the will of a third party also falls in The condition not to do an impossible thing shall be considered
this class. as not having been agreed upon, this should be understood to
• I will give you my land if war breaks out next month. include all negative impossible conditions. In this case, the
• I will give you P500 if I win this case in the SC. condition is not imposed, and the obligation is considered as
a pure and simple one.
Mixed Condition – This depends upon the will of one of the • I will give you one hectare of land if the sun does not
contracting parties and other circumstances, including the will rise on the 600th day from today.
of the third person.
• I will give you a house, if you marry Nembrod. Effect of Impossible Conditions on Divisible Obligations
When the obligation is divisible that part which is not affected
Kinds of Potestative Condition by the impossible or unlawful condition is valid.
1. Simple Potestative Condition • X promises to pay to Y the sum of P1,000 if Y furnishes
It presupposes not only a manifestation of will but also the X with information as to the whereabout of Z, and
realization of an external act, ‘if you sell your car.’ The simple another sum of P2,000 if Y kills Z. In this case, the first
Potestative condition on the part of the debtor does not condition is valid while the second is void.
prevent the formation of a valid obligation.
• The condition obviously depends on one of the ARTICLE 1184
parties’ will but in consequence of external The condition that some event happen at a determinate time
circumstances which may arise like the need for shall extinguish the obligation as soon as the time expires, or
it has become indubitable that the event will not take place.
money or advantage of transfer (sale of house).

Effect if Period of Fulfillment is Not Fixed


2. Pure Potestative Condition
Instance. An obligation to pay a sum of money is subject to the
It depends solely and exclusively on the will such as statements
condition that a certain person shall arrive at a designated place
including ‘if I like it’ or ‘if I deem it proper.’ It destroys the efficacy
in one year. This obligation shall be extinguished if:
of the legal tie. It is obvious there is no seriousness in this
1. One year passes and he does not arrive at the place
undertaking. It renders the whole obligation void.
2. Such person dies before lapse or arrive
• It is only when the Potestative condition depends
exclusively upon the will of the debtor that the
The Court shall consider the intention of the parties and the
conditional obligation is void.
time shall be that which the parties may have probably
contemplated, considering the nature of obligation.
IN THIS ARTICLE: In cases falling under this article, it is not only
the condition that is void; the whole obligation is void. This
ARTICLE 1185
provision, however, is applicable only when the condition is The condition that some event will not happen at a
suspensive, it cannot apply to resolutory conditions which are determinate time shall render the obligation effective from
valid. Thus, a potestative resolutory condition is made to depend the moment the time indicated has elapsed, or if it has
upon the will of the obligor. The obligation in such case arises become evident that the event cannot occur.
immediately, but the party who has made the reservation may
resolve it when he wishes to. If no time has been fixed, the condition shall be deemed
fulfilled at such time as may have probably been
contemplated, bearing in mind the nature of the obligation.
ARTICLE 1183
Impossible conditions, those contrary to good customs or
public policy and those prohibited by law shall annul the Application
obligation which depends upon them. If the obligation is An obligation to deliver a piece of land to X is subject to the
divisible, that part there of which is not affected by the condition that he shall not marry within two years. The
impossible or unlawful condition shall be valid. obligation shall become effective and the land should be
delivered to X if:
Impossible Conditions 1. Two years expire without X having married
The condition is physically impossible when it is contrary to the 2. X enters priesthood before the two years expire
laws of nature and it is juridically impossible when it is contrary
to law, morals, good customs and public policy. ARTICLE 1186
• Illicit conditions are determined by its effects upon one The condition shall be deemed fulfilled when the obligor
of the parties. The intention shall be considered. voluntarily prevents its fulfillment.

Application: Only to cases where the conditions was already Constructive Fulfillment
impossible from the time of the constitution of the obligation It refers to a condition which, although not exclusively within
and to positive suspensive conditions. Supervening events the will of the debtor, may in some way be prevented by the
which would render the obligation no longer impossible does debtor from happening. The mere intention of the debtor to
not affect of annulling the obligation. prevent its happening, or the mere placing of ineffective
Negative Impossible Conditions obstacles in not sufficient.
Requisites for Constructive Fulfillment
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 35

1. Intent of the obligor to prevent fulfillment of the The creditor may, before the fulfillment of the condition,
condition bring the appropriate actions for the preservation his right.
2. Actual prevention of compliance
The debtor may recover what during the same he has paid by
mistake in case of a suspensive condition.
Example: X promises to pay Y a certain sum if the latter, within
a certain time, makes dikes along sides of a canal through which
Preservation of the Creditor’s Rights
X conducts water to his land. When work is started by Y, X
Inasmuch as pending the happening of the suspensive
deviates the flow of the water to enable Y to make the dikes.
condition the creditor has only an expectancy and cannot
• But before Y has finished the work, X allows water to
compel the debtor to perform, acts or events that may take
run again through the canal, thus preventing Y from
place which might render his right illusory when the condition
finishing the work in time agreed upon.
happens. Hence, he is given remedies to preserve his rights.
• The condition shall be deemed as fulfilled in this case.
1. To prevent loss or deterioration of the things which
are the objects of the obligation by enjoining or
Exception to Constructive Fulfillment
restraining the alienation or destruction by the debtor
Where the act of the debtor, however, although voluntary, did
or by third persons.
not have for its purpose the prevention of fulfillment of the
2. Petition for the annotation of the creditor’s right if real
condition, will not fall under Article 1186.
property is involved.
3. Action to demand security in case debtor’s insolvent.
Example: A promised to pay B a certain amount if the latter
4. Action to set aside alienation made by the debtor in
constructs a wall for the former within a certain number of days.
fraud of the creditors.
Before the work is finished, A prosecutes B for a crime
committed against him, resulting to B’s imprisonment and non-
Payment Before Condition
fulfillment of the condition
Article 1188(2) permits the debtor who paid before the
happening of the condition to recover only when he paid by
Provoking Resolutory Condition
mistake and provided the action to recover is brought before
When the condition is resolutory and not dependent on the will
the action happens.
of the debtor, and debtor unjustifiably provokes or produces
• If the payment was of a determinate thing, and still in
the condition, it will be considered as not fulfilled.
the hands of the creditor, the accion reinvidicatoria will
lie, or else solutio indebiti.
ARTICLE 1187
The effects of a conditional obligation to give, once the
condition has been fulfilled, shall retroact to the day of the If not by mistake, recovery is possible or not:
constitution of the obligation. Nevertheless, when the 1. If condition is fulfilled, no recovery.
obligation imposes reciprocal prestations upon the parties, 2. If not fulfilled, there must be recovery unless it was
the fruits and interests during the pendency of the condition intended to be of pure donation.
shall be deemed to have been mutually compensated. If the
obligation is unilateral, the debtor shall appropriate the ARTICLE 1189
fruits and interests received, unless from the nature and When the conditions have been imposed with the intention
circumstances of the obligation it should be inferred that the of suspending the efficacy of an obligation to give, the
intention of the person constituting the same was different. following rules shall be observed in case of the improvement,
loss or deterioration of the thing during the pendency of the
In obligation to and not to do, the courts shall determine in condition:
each case, the retroactive effect of the condition that has (1) If the thing is lost without the fault of the debtor, the
been complied with. obligation shall be extinguished.
(2) If the thing is lost through the fault o the debtor, he
Retroactivity of the Condition shall be obliged to pay damages; it is understood
The application of the principle of retroactivity of conditional that the things is lost when it perishes, or goes out
obligations is not absolute. It is subject to certain limitations. of commerce, or disappears in such a way that its
existence is unknown, or it cannot be recovered;
(3) When the thing deteriorates without the fault of the
Conditional To give, once fulfilled shall retroact to the day
debtor, the impairment is to be borne by the
of the constitution of the obligation. creditor;
Reciprocal Fruits and interests, during the pendency shall (4) If it deteriorates through the fault of the debtor, the
considered as mutually compensated. creditor may choose between the rescission of the
Unilateral Debtor shall appropriate the fruits and obligation and its fulfillment, with indemnity for
interest received unless from the nature of damages in either case;
(5) If the thing is improved by its nature, or by time, the
the obligation it should be inferred that the
improvement shall inure to the benefit of the
intention was different. creditor;
Not/ To Do The court shall determine the retroactive (6) If it is improved at the expense of the debtor, shall
effect of the condition that has been have no other right than that granted to the
complied with. usufructuary.
ARTICLE 1188 Loss of the Thing
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 36

1. When it perishes The power to rescind obligations is implied in reciprocal


2. When it goes out of the commerce of man ones, in case one of the obligors should not comply with what
3. When it disappears in such a manner that its existence is incumbent upon him.
is unknown or cannot be recovered
The injured party may choose between the fulfillment and
If loss is due to the fault of the debtor, he becomes liable for the rescission of the obligation, with the payment of damages
damages to the creditor upon the fulfillment of the obligation. in either case. He may also seek rescission, even after he has
But if without fault, obligation is extinguished, unless there is a chosen fulfillment, if the latter should become impossible.
stipulation to the contrary.
The court shall decree the rescission claimed, unless there
Deterioration of the Thing be just cause authorizing the fixing of the period.
Deterioration is any reduction or impairment in the substance
This is understood to be without prejudice to the rights of
or value of a thing which does not amount to a loss. In other third persons who have acquired the thing, in accordance
words, the thing still exists at the time the condition is fulfilled, with Articles 1386 and 1388 and the Mortgage Law.
but it is no longer intact, or is less than what is was.
• If not imputable to the debtor, he is not liable for any Characteristics of Right to Rescind
damages and must accept in its impaired condition. 1. Exists only in reciprocal obligations. If there is a fixed
• If due to the debtor, then the creditor ay either period, no actions can be done before the expiration
demand for the thing or ask for rescission, with of the period.
damages in either case. 2. It can be demanded only if the plaintiff is ready, willing
and able to comply with his own obligation and the
Improvement of a Thing other is not
Anything added in, incorporated in, or attached to the thing 3. It is not absolute
due is considered an improvement. Slight breach is not sufficient. The right to rescind is
• If caused by nature or by time, such as alluvion, this not absolute and will not be granted if there has been
improvement shall be to the benefit of the creditor. substantial performance by partial payments (Tayag).
• If it was at the expense of the debtor, the law says he 4. It needs judicial approval in some cases
shall have the same rights as a usufructuary with If there is delivery, judicial approval is needed.
respect to the improvement. 5. The right to rescind is implied to exist
6. The right to rescind may be waived expressly or
Usufructuary rights – this means that the debtor without impliedly
damage to the hang due, may remove the same, but if the
removal cannot be made without injury to the thing due, then Reciprocal Obligations
the improvement must be delivered together with the thing to Article 1191 only applies when there are reciprocal obligations.
the creditor without the latter paying any indemnity. There must be reciprocity between them. Both relations must
arise from the same cause, such that one obligation is
ARTICLE 1190 correlative to the other. They must not be mutually obligated,
When the conditions have for their purpose the
but should have reciprocity which arises from identity of cause,
extinguishment of an obligation to give, the parties, upon
fulfillment of said conditions, shall return to each other what and two obligations created at the same time.
they have received.
Reciprocal obligations are those which arise from the same
In case of loss, deterioration or improvement of the thing, the cause, and in which each party is a debtor and a creditor of the
provisions which, with respect to the debtor, are laid down other, such tat the obligation of one is dependent upon the
in the preceding article shall be applied to the party who is obligation of the other. They are to be performed simultaneously
bound to return.
so that the performance of one is conditioned upon the
simultaneous fulfillment of the other.
As for obligations to do and not to do, the provisions of the
second paragraph of Article 1187 shall be observed as to the
effect of the extinguishment of the obligation. Tacit Resolutory Condition
Article 1191 recognizes that there is an implied or tacit
Effect When Resolutory Conditions is Fulfilled resolutory condition in reciprocal obligations. It is a condition
In conditional obligations, the rights of the creditor are vested imposed by law.
but are always in the danger of being extinguished by • Delay in reciprocal obligations happen when one
happening of the resolutory condition. party has performed his part of the contract, the other
1. Obligation is extinguished party now is in delay, for it should be simultaneous.
2. Parties shall return what they have received, including • The party who has performed or is ready and willing
fruits sand interests. to perform may rescind the obligation if the other
3. Courts shall determine the retroactivity. does not perform or is not ready and willing to
4. In case of loss, deterioration, or improvement apply perform.
Article 1189.
ARTICLE 1191 Power to Rescind, Party Entitled
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 37

The power to rescind is given to the injured party. Where the Article 1181. – Acquisition and Extinguishment of Rights
plaintiff is the party who did not perform the undertaking which
he was bound to do is not entitled to insist upon the DEVELOPMENT BANK v. COURT OF APPEALS (1996)
performance of the contract because of his own breach.
• An action for specific performance is an equitable Facts: Private respondents were the original owners of a parcel
proceeding, and he who seeks to enforce it must also of agricultural land covered by TCT No. T-1432, situated in
come in equity. Barrio Capucao, Ozamis, City of 113,695 sq.m. On 30 May 1977,
private respondents mortgaged the said land to the petitioner,
Where one party fails to comply with his obligation under a and the latter foreclosed the mortgage on the land and emerged
contract, the other party has the right to either: as the sole bidder in the ensuing action sale (TCT T-10913).
(1) Demand performance
(2) Ask for the resolution of the contract April 6, 1984, they entered into a Deed of Conditional Sale
The choice remains with the injured party. The defendant wherein petitioner agreed to reconvey the foreclosed property
cannot set up the defense that his liability was satisfied by his to the private respondents, agreement are as follows:
having waived of the payment in an installment agreement.
Vendees offered to repurchase, and the Vendor agree to sell the
If both parties are in breach of obligation and it cannot be property for the sum of P73,700 with a down payment of P8,900 and
the balance shall be payable in six years on equal quarterly amortization
determined who was the first infractor, the contract shall be
plan at 18% interest per annum. The first quarterly amortization of
deemed extinguished and each shall bear his own damages.
P4,470.36 shall be payable three months from the date of the execution
of the documents. That upon completion of the payment herein
Damages for Breach of Lease Contract stipulated and agreed, the Vendor agrees to deliver to the Vendees a
If lessor demands rescission, he gets only the back rents and good and sufficient deed of conveyance covering the property, subject
ouster the lessee plus damages but not future events. Even if matter of this deed of condition sale.
there is no corresponding agreement between the parties the
law provides for such power to rescind. On April 6, 1990, upon completing the payment of the full
• This article does not apply when the parties made a repurchase price, they demanded from the petition the
stipulation providing for the automatic rescission of execution of the Deed of Conveyance in their favor. Petitioner
the contract in case of violation of terms thereof informed that the prestation to execute had become legally
without need of judicial intervention. impossible in view of the Comprehensive Agrarian Reform Law.
• Complained specific performance with damages.
Declaration of Rescission
The rescission may take place by the declaration of the inured Did the subject property become a legally impossible prestation
party, rescission is a power which does not require the previous due to the enactment of the CARL?
declaration by the courts.
Acquisition and Loss of Rights in Conditional Obligations
Extrajudicial rescission produces legal effects. Once one of the The acquisition as well as the extinguishment or loss of those
parties fails to comply with his obligation, the other is relieved already acquired shall depend upon the happening of the event
from complying his, and he may therefore by his own which constitutes the condition.
declaration elect to rescind by not performing his own
undertaking. IN THE CASE: The deed of conditional sale between petitioner
and private respondents was executed on April 6, 1984 and
When can there be extrajudicial or judicial rescission? that they paid religiously the agreed installments until they
When there has been no performance of the obligation or completed the payment on April 6, 1990. Petitioner in fact, had
whatsoever. If not performed yet, the extrajudicial rescission allowed them to fulfill the condition effecting full payment and
would suffice. However, if the injured party has already then invoked Section 6 of RA 6657 only after private
performed his obligation, he cannot by his own declaration respondents have fully paid the repurchase price.
rescind the contract. Hence, the court must declare rescission.
• He cannot by his own declaration rescind the contract On the contention that RA 6657 rendered prestation impossible:
and reacquire title to the property if the other party It will be noted that RA 6657 was enacted on June 10, 1988.
opposes the rescission. However, neither RA 6657 nor EO 407 was intended to impair
• Court to declare that the rescission has been properly the obligation of contract petition had much earlier concluded
made or give the debtor a period for him to perform. with the private respondents.
If the debtor impugns the declaration of rescission, it shall be • The last paragraph of Section 6 of RA 6657 provides
OBLIGATIONS AND
subject to judicial determination. that “any sale, lease or possession of private lands
executed by the original landowner.
CONTRACTS The original landowner in this case is not the bank but the
Articles 1179-1192 private respondents. Petitioner acquired the land through the
JURISPRUDENCE NOTES foreclosure proceedings but agreed reconveyance.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 38

• Section 6 of RA 6657 deals with the retention limits • The donation had to be valid before the fulfillment of
allowed by law to small landowners. Since the the condition.
property is ten hectares, it is then within the • If there was no fulfillment or compliance with the
jurisdiction of the DAR to determine whether the condition, such as what happened in this case, the
property can be subjected to agrarian reform. donation may now be revoked and all rights which the
donee may have acquired under it shall be deemed to
The law did not intend to take away property without due be lost or extinguished.
process of law. Nor is it intended to impair the obligation of
contracts. EO 407 was also enacted two months after private No More Need to Fix the Duration of a Term
respondents fulfilled condition and these laws cannot have When Such Would Delay or Lead to Unnecessary Suits
retroactive effect unless express provision in them. On the defense of prescription. The condition imposed by the
donor depended upon the exclusive will of the donee when this
Held: The decision of the RTC to grant the petition of the condition shall be fulfilled. Since the time depended on such, it
private respondents on the delivery of obligation is affirmed. has been held that its absolute acceptance and the
acknowledgment of the obligation were sufficient to prevent
CENTRAL PHILIPPINES UNIVERSITY v. CA (1995) the statute of limitation from barring such agreement.

Facts: Sometime in 1939, the late Don Ramon Lopez, Sr., who As a rule, when the obligation does not fix a period but from its
was then a member of the Board of Trustees of the CPU nature and circumstances a period was intended then Article
executed a Deed of Donation in favor of the latter of a parcel 1197 provides that the Courts may fix the duration because the
of land issued in the name of the CPU with annotations: fulfillment of the obligation cannot be demanded.
1. The land described shall be utilized by the CPU exclusively
for the establishment and use of a medical college with all In this case: This general rule cannot be applied in this case.
its buildings as part of the curriculum. More than a reasonable period of fifty years has already been
2. The said college shall not sell, transfer, or convey to any third allowed petitioner to avail the opportunity to comply with the
party nor in any way encumber said land. condition even if it be burdensome, to make the donation in its
3. The said land shall be called Ramon Lopez Campus and the favor to be forever valid. It failed to do so.
said college shall be under obligation to erect a cornerstone
• There is no more need to fix the duration of a term of
bearing such name. Any net income shall be put into a fund
an obligation when such procedure would be a mere
knows as Ramon Lopez Campus fund to be used for the
improvements of said campus and erection of building. technicality of formality and would serve no purpose
than to delay or lead to an unnecessary and expensive
On May 31, 1989, the private respondents who are the heirs of multiplication of suits.
Don Ramon Lopez, Sr., filed an action for Annulment of the
Donation, Reconveyance and Damages against the CPU Article 1184. – Positive Condition
alleging that since 1939 up to the time the action was filed the
latter had not complied with the conditions of the donation. MEGAWORLD, INC. v. MAJESTIC FINANCE (2015)
Petitioners argue that the action had prescribed.
Facts: On September 23, 1994, Megaworld Properties
RTC. Held petitioner to have failed to comply with the (developer) entered into a Joint Venture Agreement (JVA)
conditions of the donation and declared it null and void. CA with Majestic Finance (owner) for the development of
ruled that the annotation was resolutory conditions that in case residential subdivision located in Cavite.
of breach it was considered to have terminated the rights and
remanded the case for determination of the period. According to the JVA, the development of the 215 hectares of
land belonging to the owner would be for the sole account of
Was there a breach on the conditions stipulated in the deed of the developer and upon completion of the development of the
donation committed by the CPU? subdivision, the owner would compensate the developer in the
form of saleable residential subdivision lots.
Onerous Donation and Resolutory Conditions • Developer would advance all costs for the relocation
It was a donation executed for a valuable consideration which and resettlement of the occupants in the joint venture
imposes a burden which requires the latter to comply. This is property subject to reimbursement of the owners.
applied in the Deed of Donation executed between Ramon •
Lopez Sr. and the Central Philippines University. • Developer would deposit the initial amount of P10M
to defray the expenses for the relocation and
Article 1181 of the Civil Code provides that on conditional settlement and the costs for obtaining Government
obligation, the acquisition of rights, as well as the permits and required clearances.
extinguishment as those acquired shall depend.
When a person donates land to another on the condition that the On September 24, 1994, the developer and owner agreed,
latter would build upon the land a school, the condition imposed through an addendum to the JVA to increase initial deposit of
was not a suspensive condition, it was resolutory. P10M to P60M.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 39

soon as the time expires, or if it has become indubitable that


On October 27, 1994, the developer by Deed of Assignment the event will not take place.
transferred, conveyed and assigned to Empire East Land
Holdings (developer/assignee) all its rights and obligations In this case: The common cause of the parties in entering into
under the JVA including the addendum. the joint venture was the development of the joint venture
property into the residential subdivision as to eventually profit
On February 29, 2000, Majestic filed RTC for specific therefrom. Consequently, all of the obligations under the JVA
performance with damages against the developer, the were subject to the happening of the complete development of
developer/assignee and Andrew Tan. It was based on the failure the joint venture property, or if it would become indubitable that
of the petitioner to comply with their obligation under the JVA, the completion would not take place.
including the obligation to maintain a strong security force to • Should any of the obligations whether continuous or
safeguard the property from illegal entrants and occupants. activity be not performed, all other remaining
• There was an attempt to reach amicable settlement. obligations would not ripen into demandable
obligations while those already performed would
On September 16, 2002, Majestic filed again that petitioners be cease to take effect.
directed to provide round the clock security for the property to
defend and protect it from invasion of unauthorized persons. Delay in Reciprocal Obligations
Petitioners opposed alleging that (1) it was premature and that Being reciprocal in nature, their respective obligations as the
(2) under the principle of reciprocal obligations, the owner owner and the developer were dependent upon the
could not compel them to perform their obligations under the performance by the other of its obligations; hence, any claim of
JVA if owner does not honor its obligations. delay or nonperformance against the other could prosper only
if the complaining party had faithfully complied with its own
Can the owner can compel developer to comply with their correlative obligation.
obligation to provide security?
In the case: The record is bereft of the proof to support that
Joint Venture Agree is a Reciprocal Obligation Majestic had perform its obligation as to place itself in the
They are those that arise from the same cause and in which position to demand from the developer. There was also
each party is a debtor and creditor to each other at the same insufficient showing that the developer failed to provide
time such that the obligations of one are dependent upon the security for the protection of the property.
obligations of the other. They are to be performed
simultaneously so that the performance by one is conditioned Article 1186. – Constructive Fulfillment
upon the simultaneous fulfillment of the other.
TAYAG v. COURT OF APPEALS (1993)
The determination of default on the part of either of the parties
depends on the terms of the JVA categorized into two types: Facts: On May 28, 1975, Juan Galicia Sr., and Celerina Labuguin
1. Continuous Obligations – these are which to be executed a Deed of Conveyance involving an undivided one-
continuously performed from the execution of the JVA half portion of a piece of land situated at Nueva Ecija for P50K.
until the parties achieved the purpose of venture. This is the subject matter of the heirs of Galicia who assert
a. Developer would secure property from breach of the conditions as against private respondent’s claim
unauthorized occupants. anchored on full payment and compliance with stipulations.
b. Owner would allow developer to take • P9,707 was only tendered (P10K – ten-day agreement)
possession of the property. • P6,926 only of P10K assumption of the debt from bank
c. Owner would deliver documents necessary • Not a single centavo of remaining P27K was paid.
for the accomplishment of activities. RTC ordered the heirs to execute the Deed of Sale of the
property in favor of Albrigido Leyva.
2. Activity Obligations
a. Relocation Estoppel or Waiver by Acceptance of Delayed Payments
b. Completion of development plan Instead of immediately filing the case precisely to rescind the
c. Securing exemption and conversion permits instrument because of non-compliance, allowed private
d. Obtention of development permits respondent to effect numerous payments posterior to the grace
e. Development of the subject land periods provided in the contract. This apathy of petitioners who
f. Issuance of titles for the subdivided lots even permitted private respondent to take the initiative in filing
g. Selling of the subdivided lots the suit for specific performance against them, is akin to waiver
In each activity, the obligation of each party was dependent or abandonment of the right to rescind normally conferred by
upon the obligation of the other. The performance of an activity Article 1191 of the Civil Code.
obligation was still conditioned on the continuous.
Positive Condition on Unfixed Period of Fulfillment Indeed, the right to rescind is not absolute and will not be
According to Article 1184, the condition that some event granted where there has been substantial compliance by partial
happen at a determinate time shall extinguish the obligation as payment. By and large, petitioners' actuation is susceptible of
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 40

but one construction—that they are now estopped from he puts issue in his pleading, among others, its failure to
reneging from their commitment because acceptance of express the true intent and agreement of the parties thereto.
benefits arising from overdue accounts of private respondent.
• Consignation has the effect of payment in the case at Article 1191 on Resolution is Predicated on Breach of Faith
bar because the heirs claimed the same right to collect Rescission will not be permitted for a slight or casual breach of
such and they did not dispute such allegation. contract. Rescission may be had only for such breaches that are
substantial and fundamental as to defeat the object of the
Article 1191. – Resolution/Rescission parties in making the agreement. The question upon what is
substantial depends on the attending circumstances and not
CANNU v. GALANG (2005) merely on the percentage of the amount not paid.

Facts: A complaint for Specific Performance and Damages was In the case: The Court finds the petitioners failure to pay the
filed by petitioners-spouses Felipe and Leticia Cannu against balance of P45,000 to be substantial the percentage of 18% is
respondents-spouses Gil and Fernandina Galang and the still substantial taken together the fact that the last payment
National Home Mortgage Finance Corporation (NHMFC). was made on eighteen months before Galang (owner) herself
Respondents obtained a loan from Fortune Savings & Loan paid the remaining balance thus the intention of the petitioners
Association for P173,800.00 to purchase a house and lot located to renege on their obligation is utterly clear.
at Las Piñas, with an area of 150 square meters.
On the Allegation of Tender of Payment
To secure payment, a REM was constituted on the said house The fact that petitioners tendered a Manager’s Check to
and lot in favor of Fortune Savings and Loan and in 1990 the respondents-spouses Galang in the amount of P278,957.00
NHMFC purchased the mortgage loan for a price of P173,800. seven months after the filing of this case is of no moment.
Respondent Galang authorized her attorney-in-fact Timbang Tender of payment does not by itself produce legal payment,
to sell the house and lot. unless it is completed by consignation.

Petitioner Leticia Cannu agreed to buy the property for Petitioners did Not Religiously Pay
P120,000 and to assume the balance of the mortgage As admitted by them, in the span of three years from 1990 to
obligations with the NHMFC and CERF Realty. They have a 1993, their payments covered only thirty months. This, indeed,
balance of P45,000. A Deed of Sale with Assumption of constitutes another breach or violation. On top of this, there
Mortgage Obligation on August 20, 1990 was made and was no formal assumption of the mortgage obligation with
entered between spouses Galang and spouses Cannu. NHMFC because of the lack of approval by the NHMFC because
petitioners’ non-submission of requirements to be considered
Despite requests from Adelina R. Timbang and Galang to have as assignees/successors-in-interest over the property covered
them pay the balance of P45,000 or in alternative to vacate the by the mortgage obligation.
property in question, the petitioners refused to do so.
Demand was Made upon the Petitioners
In 1993, Cannu informed the Vice President of the NHMFC that There is sufficient evidence showing that demands were made
the property’s ownership rights have been transferred to her from petitioners to comply with their obligation. Adelina R.
per deed of sale with assumption mortgage and that they were Timbang, attorney-in-fact of respondents-spouses, per
obliged to assume the mortgage and pay the remaining unpaid instruction of respondent Fernandina Galang, made constant
loan balance, but the formal assumption was not approved. follow-ups after the last payment made on 28 November 1991,
but petitioners did not pay.
Because Cannu failed to fully comply with their obligations,
respondent Galang on May 21, 1993 paid P233,957 as full There is no waiver. The fact that respondents-spouses
payment of her remaining mortgage with the NHMFC. accepted, through their attorney-in-fact, payments in
• Petitioners oppose such release because the subject installments does not constitute waiver on their part to exercise
property has already been sold to them. their right to rescind. Adelina Timbang merely accepted the
• They filed a Complaint for Specific Performance asking installment payments as an accommodation to petitioners
that Cannu be declared the owners of the property since they kept on promising they would pay. It was only after
involved subject to reimbursements. petitioners stopped paying that respondents-spouses
• NHMFC answered that they have no cause of action moved to exercise their right of rescission.
because they failed to pay the consideration.
On Demandability of the Obligation
Discussion: What is clear is that the agreement of the Deed of Galang complied with their obligation when they gave the
Sale with Assumption of Mortgage is a consideration of P120K possession of the property in question to petitioners. Thus, they
plus the outstanding loan mortgage. have the right to ask for the rescission of the Deed of Sale with
Under the Rules of Court, a party may present evidence to Assumption of Mortgage.
modify, explain or add to the terms of the written agreement if Rescission under Article 1191 and 1381, Distinguished
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 41

As discussed by Justice Reyes in the case of Universal Food Corp (1) were old;
v. Court of Appeals Article 1191 is different from 1381: (2) did not have instruction manuals and warranty
certificates;
Article 1191 Article 1381 (3) contained indications of being reconditioned
It is predicated on the It is because of lesion or machines; and
breach of faith by the economic prejudice based (4) did not meet the IMO and CHED standards.
defendant that violates the on pecuniary injury. Northwestern demanded compliance with the agreement and
reciprocity between the suggested that GL Enterprises meet with the former’s
parties. representatives to iron out the situation.
It is a principal action based It is a subsidiary action.
on breach that violates the Instead of heeding such suggestion, GL Enterprises filed a
reciprocity. complaint for breach of contract and prayed for P1.97M
Only on reciprocal Applicable to unilateral representing how much it could have earned.
obligations. obligations. • Petitioner alleged that Northwestern breached the
Only among the parties, It can be invoked by a third contracts by ordering the work stoppage and thus
especially injured party. person. preventing the installation of the materials for the IBS.

In the case: The reciprocity between parties was violated when Was there substantial breach of the contracts that would
the petitioners failed to fully pay the P45,000 to the respondent warrant the application of Article 1191?
spouses and failure to update their amortizations.
Substantial Breaches of the Contracts
Held: Having found that petitioners seriously breached the The contracts require no less than substantial breach before
contract, therefore the Court declares the same as rescinded in they can be rescinded. As held in Cannu v. Galang, the question
favor of the Galang spouses. Because of the rescission, it is the of whether a breach of contract is substantial depends upon the
duty of the court to require the parties to surrender whatever attending circumstances.
they may have received from each other and that parties should
be restored to their original situation. In the case: The parties explicitly agreed that the materials to
be delivered must be compliant with the CHED and IMO
MAGLASANG v. NORTHWESTERN UNIVERSITY (2013) standards and must be complete with manuals.

Facts: On June 10, 2004 respondent Northwestern University Evidently, the materials delivered were less likely to pass the
engaged the services of GL Enterprises to install a new IBS in CHED standards, because the navigation system to be installed
Laoag City for it was required for training laboratory so that the might not accurately point to the true north; and the steering
school could offer maritime transportation programs. well was one from automobile rather than those from the ships.
GL Enterprises did not dispute the allegation their equipment
• Since its Integrated Bridge System was obsolete it being substandard.
required the petitioner to supply and install specific
components to perform standards required. On the Allegation that CHED must check Standards
Allegation not sustained. Respondent could not just “sit still and
They executed two contracts with the similar provisions: wait for such day that its accreditation may not be granted by
(1) The IBS and its components must be compliant with CHED due to the apparent substandard equipment installed in
IMO and CHED standards. the bridge system.” The appellate court correctly emphasized
(2) The contracts ay be terminated if one party commits a that, by that time, both parties would have incurred more costs
substantial breach of its undertaking. for nothing. The stoppage of the installation was justified.
(3) Any dispute under the agreement shall first be settled
mutually between the parties before court action. SWIRE REALTY DEVELOPMENT v. YU (2015)

Subsequently respondent Northwestern paid P1M as Facts: Respondent Jane Yu and Swire Realty entered into a
downpayment to the GL Enterprises. Two months after the Contract to Sell on July 25, 1995 covering one residential
execution of the contracts, GL Enterprises technicians delivered condominium unit at Makati City with an area of 137.30 sq.m.
various materials to the project site. for the contract price of P7,519,371 payable in equal monthly
• When they start installing the components installments until September 24, 1997. Respondent likewise
respondent halted the operations. purchased a parking slot in the same building for P600K.

Northwestern justified the work stoppage upon its finding that On September 24, 1997 (due date) she paid the full purchase
the delivered equipment was substandard. It explained further price for the unit while making a downpayment of P20K for the
that GL Enterprises violated the terms and conditions of the parking lot. Notwithstanding such, petitioner failed to complete
contracts. and deliver the subject unit on time.
The reasons constituting the allegation because equipment:
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 42

This prompted Yu to file a Complain for Rescission of Contract On June 13, 1996, Fong sent a letter to Duenas informing him
with Damages before the Housing and Land Use Regulatory of his decision to limit his total contribution from P32.5M to
Board (HLURB-NCR). In 2004, it dismissed the complaint for it P5M. Pertinent parts of the letters are as follows:
was of slight or casual breach and not substantial. Upon • Faced with personal factors which resulted to turning down
elevation to the HLURB-BOC it was ordered to be rescinded. of many business opportunities.
However, upon elevation to the Office of the President (OP), it • For us, it does not make sense anymore to go for a significant
shareholding when we cannot be hands on and participate
held that the breach was not substantial.
actively as originally planned. For your information, we will
probably be giving up our subway franchise too.
Is the breach substantial to warrant the application of the • Together with our business advisers and legal counsel, we
Article 1191 on the rescission of the obligation? came to a decision to hold our commitment (from advances to
investment) at P5 million only for now from the original plan
Right to Rescind Obligations under Article 1191 of P32.5 million, if this is acceptable to you.
Basic is the rule that the right of rescission of a party to an • We have put our money down in trust and good faith despite
obligation under Article 1191 is predicated on a breach of faith the much-delayed financials.
by the other party who violates the reciprocity between them.
Fong observed that despite his P5M contribution, Duenas still
The breach contemplate is the obligor’s failure to comply with
failed to give him the financial documents on the valuation of
an existing obligation. When obligor cannot comply, the
the Danton and Bakcom shares.
obligation may seek rescission.
• In addition, Duenas failed to have Alliance be
registered and incorporate with the SEC.
In the case: Even the extension granted, the unit was not yet
finished as the kitchen cabinets and fixtures were not yet
These circumstances convinced Fong that Dueñas would no
installed and the agreed amenities were not yet available upon
longer honor his obligations in their joint venture agreement.
inspection of the HLURB-NCR. It is evident that the report on
thus, on October 30, 1997, Fong wrote Dueñas informing him
the ocular inspection conducted on the subject condominium
of his decision to cancel the joint venture agreement.
project and subject unit shows that the amenities under the
• He also asked for the refund of the P5 Million that he
approved plan has not been provided as of May 3, 2002 and
advanced.
was not delivered to the respondent which is beyond the
• Dueñas admitted that he could not immediately
extended period of 1999.
return the money since he used it to defray the
business expenses of Danton and Bakcom.
Held: Incontrovertibly, petitioner had incurred delay in the
performance of its obligation amounting to breach of contract
On March 25, 1998, Fong wrote a final letter of demand
as it failed to finish and deliver the unit to respondent within
informing Dueñas that he would file a judicial action against
the stipulated period. The delay in the completion of the project
him should he still fail to pay after receipt of this written
as well as of the delay in the delivery of the unit are breaches
demand. Since Dueñas did not pay, Fong filed a complaint
of statutory and contractual obligations which entitle
against him for collection of a sum of money and damages on
respondent to rescind the contract, demand a refund and
April 24, 1998.
payment of damages.

RTC. Noted that failure to furnish the financial document and


FONG v. DUEÑAS (2015)
almost one-year delay in the incorporation of Alliance which
caused Fong to rescind the JVA.
Facts: Respondent is engaged in the bakery, food
manufacturing and retailing business which are all operated
CA. Reversed. Contrary to the trial court’s ruling, Dueñas
under his two companies D.C. DANTON Inc. (Danton) and
correctly invested Fong’s P5 Million contribution to Bakcom
Bakcom Food Industries (Bakcom). He was an old acquaintance
and Danton. This did not deviate from the parties’ original
of Fong as they were former schoolmates at DLSU.
agreement as eventually, the shares of these two companies
would form part of Alliance’s capital. Fong payment must be
Sometime in November 1996, they entered into a Verbal Joint
treated as share subscription to Alliance.
Venture Contract where they agreed to engage in the food
business and to incorporate a holding company under the
Was the any breach of obligations on the verbal joint venture
name of Alliance Holdings, Inc. (proposed corporation). With
agreement that would warrant rescission?
a capitalization of P65M to which contributes in equal.
• The parties agreed that Fong would contribute
Discussion: On the validity of the joint venture agreement
P32.5M while Duenas would contribute both Danton
which was verbal; the failure to reduce the agreement to writing
and Bakcom shares which he valued also at P32.5M.
does not affect its validity or enforceability as there is no law or
regulation which provides that an agreement to incorporate
Fong required Duenas to submit the financial documents
must be in writing. Thus the agreement to incorporate the
supporting the valuation of such shares. On November 25, 1996
shares of Bakcom, Danton and Boboli is valid under the eyes
Fong started remitting the tranches of his share in the capital
of the law.
while Duenas processed an international license.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 43

The Body rather than Title of Complaint Fong is also in Breach of the Joint Venture Agreement
Determines the Nature of the Action In his letters, although these reasons appear to be valid, they
A well-settled rule in procedural law is that the allegations in do not erase the fact that Fong still reneged on his original
the body of the pleading or the complaint, and not its title, promise to contribute P32.5 Million. Hence, Fong’s
determine the nature of an action. diminution of his capital share to P5 Million also amounted to
a substantial breach of the joint venture agreement, which
IN THE CASE: An examination of Fong’s complaint shows that breach occurred before Fong decided to rescind his agreement
although it was labeled as an action for a sum of money and with Dueñas. Thus, Fong also contributed to the non-
damages, it was actually a complaint for rescission. incorporation of Alliance needed P65M as capital to operate.
• Fong’s allegations primarily pertained to his
cancellation of their verbal agreement because Article 1192 Application on Mutual Breach of Obligation
Dueñas failed to perform his obligations to provide The provision reads, in case both parties have committed a
verifiable documents on the valuation of the breach of the obligation, the liability of the first infractor shall
Danton’s and Bakcom’s shares, and to incorporate be equitably tempered by the courts. If it cannot be determined
the proposed corporation. which of the parties first violated the contract, the same shall
be deemed extinguished, and each shall bear his own damages.
Rescission under Article 1191 is Applicable
Reciprocal obligations are those which arise from the same In the case: The facts, however, show that both parties began
cause, in which each party is a debtor and a creditor of the performing their obligations after executing the joint venture
other, such that the obligation of one is dependent on the agreement. Fong started remitting his share while Dueñas
obligation of the other. started processing the Boboli international license for the
proposed corporation’s food business. The absence of a written
In the case: Fong and Dueñas’ execution of a joint venture contract renders the Court unsure as to whose obligation must
agreement created between them reciprocal obligations that be performed first.
must be performed to fully consummate the contract and • Despite these gray areas, the fact that both Fong and
achieve the purpose for which it was entered into. Dueñas substantially contributed to the non-
incorporation of Alliance and to the failure of their
On the Allegation that Payments are Treated as Subscription food business plans remains certain.
The parties never agreed that Fong would invest his money
in Danton and Bakcom. Contrary to the submission, Fong’s Held: The Court holds that the joint venture agreement
understanding was that his money would be applied to his between Fong and Dueñas is deemed extinguished through
shareholdings in Alliance. rescission under Article 1192 in relation with Article 1191
• According to the Corporation Code, there must be of the Civil Code. Dueñas must therefore return the P5 Million
the existence of 25% of the capital stock, to prove that Fong initially contributed since rescission requires
compliance with this requirement, the SEC requires mutual restitution. After rescission, the parties must go back
the incorporators to submit a treasurer’s affidavit and to their original status before they entered into the agreement.
a certificate of bank deposit, showing the existence of • No damages for each party shall bear own damages.
an amount compliant with the prescribed capital
subscription. ASCANO-CUPINO v. PACIFIC REHOUSE (2015)

This would lead to a conclusion that Fong’s cash contributions Facts: On October 1, 1994 Ascano-Cupino sisters entered a
play an indispensable part in Alliance’s incorporation. The Deed of Conditional Sale with Pacific Rehouse Corporation.
process necessarily requires the money not only to fund The latter obliged itself to purchase from the Ascanos a parcel
Alliance’s registration with the SEC but also its initial capital of land with an area 59,753 sq.m. in Cavite for P5,975,300.
subscription.
• Thus, Dueñas erred when he invested Fong’s Following the terms of the Deed of Conditional Sale, Pacific
contributions in his two companies. This money paid a downpayment of P1,792,590 leaving a balance of
should have been used in processing Alliance’s P4,182,710 to be paid upon the fulfillment of certain conditions:
registration. Its incorporation would not materialize if 1. Completion of all documents necessary for the
there would be no funds for its initial capital. transfer of the certificate of the title of the land.
2. The Ascanos shall guarantee the removal of tenants,
On the Valuation of the Danton and Bakcom squatters and other occupants on the land, with the
Dueñas also failed to deliver the valuation documents of the disturbance compensation be paid by Ascanos.
Danton and Bakcom shares to prove that the combined values 3. Submission by Ascanos to Pacific of the Affidavit of
of their capital contributions amounted to P32.5 Million. Non-Tenancy and the land operation transfer
documents.
These acts led to Dueñas’ delay in incorporating the planned In 1994 asked advance of P600,000 to be deducted from the
holding company, thus resulting in his breach of the purchase price and P1,000,000 in 1995 for the Deed of
contract. Conditional Sale processing.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 44

On February 13, 1995 petitioners submitted to Pacific a Witness is not a party to the contract and is not automatically
Barangay Agrarian Reform Council Certification that the converted to a party simply because, under some other
property was untenanted. And informed Pacific that the other extraneous document or circumstance he was the corporations’
necessary documents were being processed and expected to authorized representative.
be completed next month. • Addendum did not alter the parties’ obligation under
the Original Deed of Sale.
The following month, the petitioners failed to submit the
necessary documents despite several demands from Pacific to Pacific is Entitled to Specific Performance, Article 1191
do such. Instead, they informed Pacific that they wanted to The injured party is the party who has faithfully fulfilled his
rescind the contract and refused to accept payments. obligation or is ready and willing to perform his obligation.”
• Pacific then discovered that petitioners were From the foregoing, Pacific is the injured party, entitled to
negotiating the sale of the property with other elect between rescinding of the contract and exacting
buyers allegedly for a higher consideration. fulfillment of the obligation. It has opted for the remedy of
• Petitioners continued to ignore the demands of Pacific specific performance, as embodied in its Amended Complaint.
prompting it to file for Cancellation of Contract, Sum • Allegation of Lower Price. Check vouchers issued by
of Money and Damages later amended to Specific Pacific for each of its payments, the consideration
Performance no more cancellation. under the contract was stated as P100 per square
meter. These check vouchers were acknowledged and
Petitioners’ Allegation signed by petitioners.
It was Pacific who defaulted in its payment. They maintained
that the real purchase price they agreed upon was P200/sq.m. Held: Specific Performance granted. Pacific, therefore, has a
or a total of P11,950,600 and that allegedly the much lower balance of P1,577,530 to be paid upon the fulfillment by
amount was stated under Pacific’s request to lower taxes. petitioners of their obligations under the Deed of Conditional
• Addendum: Pacific undertook the obligation to pay Sale. Thereafter, petitioners are to execute the Deed of Absolute
the tenants of the disturbance compensation Sale in favor of Pacific and deliver all the necessary documents
amounting to P792K but was never paid to the tenants to consummate the sale.
in violation the addendum to the stipulations.
NOLASCO v. CUERPO (2015)
Pacific’s Counterclaim
Pacific refused to acknowledge the Addendum because the Facts: On July 22, 2008, petitioner and respondent entered into
same was not signed by its authorized representative, Dee a Contract to Sell over a 165,775 sq.m. parcel of land in Rizal.
Hua T. Gatchalian, who was the signatory in the Deed of the The pertinent provision of the contracts are as follows:
Conditional Sale and denied that price agreed upon. (a) Consideration of the sale is P33,155,000 payable
through DP of P11,604,250 inclusive of P2M
RTC. Cancelled the contract and addendum. CA. Reversed and reservation fee and the remaining balance of
set aside the RTC decision for rescission was not warranted in P21,550,750 payable in 36-month installments each in
this case because the petitioners were the ones who failed the amount of P598,632 through postdate checks.
under the contract. Pacific is the injured party entitled to choose (b) In case any of the checks are dishonored, the amounts
between fulfillment or obligation. already paid shall be forfeited in petitioner’s favor and
the latter shall be entitled to cancel the subject
Obligations under the Deed of Conditional Sale contract without judicial recourse.
Pacific seeks for Specific Performance particularly for the (c) Respondents are not entitled to possess the subject
petitioner to execute a Deed of Absolute Sale and fulfill their land until full payment of the purchase price.
obligation under the Deed of Sale. In sum the obligations are: (d) Petitioners shall transfer the title over the subject land
• Pacific Rehouse obligations are: from a certain Santos to petitioners’ names, should
o pay downpayment P1,892,590 (performed) they fail to do so, respondents may cause the said
o pay balance upon completion of the transfer and costs against monthly amortizations.
pertinent documents necessary for transfer. (e) Upon full payment, petitioners shall transfer title.
• Ascanos’ obligations are:
o Furnish Pacific with all the pertinent However, in November 7, 2008 respondent sent petitioners a
documents to effect transfer of property. letter seeking to rescind the subject contract on the ground of
o Guarantee removal of tenants and shoulder financial difficulties in complying the same. They sought the
the full amount of disturbance compensation return the amount of P12,202,882 they had paid to the
o Furnish certificate of non-tenancy of land petitioners. The letter was unheeded, respondents filed for
and operation transfer document. rescission before the RTC.
• Petitioners countered that the act is unilateral
On the Validity of the Addendum. It cannot prevail the original cancellation of the subject contract as the former
deed for it was not signed, and Fortuno was just a mere witness did not consent to it. Financial difficulties are not
to such. among the ground for a valid rescission.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 45

RTC. Contract is rescinded and that the petitioners failed to • The vendee shall finish the construction of its building
cause the completion of the transfer of registration of title of within four years from December 31, 1991.
the property. CA. It affirmed the RTC for the petitioners failed
to transfer the subject land from Santos to Nolasco within 90 On December 28, 1996, Amethyst assigned the subject
days from the execution of the said contract. property to its sole stockholder, the ASB Realty Corporation
under a Deed of Assignment in Liquidation in consideration
Was the rescission proper? of 100,000 shares of the outstanding capital stock, such was
transferred free from any liens or encumbrances.
Article 1191 and Reciprocal Obligations
In reciprocal obligations, either party may rescind or resolve the On July 7, 2000, Ortigas filed its Complaint for Specific
contract upon the other party’s substantial breach. The Performance against the petitioner, alleging violation of:
retaliatory remedy is given to the injured party. • While the lot may be used only for office and
residential purposes, defendant introduced
In the case: The RTC and CA bases the rescission of the contract construction on the property which are commercial in
on the violation of paragraph 7 of the agreement. The lower nature like restaurants and retails stores.
courts have misinterpreted such paragraph. It provides: • Commercial structures extend up to the boundary
lines of the lot in question.
[Petitioners] shall, within ninety (90) days from the signing of • Failed to submit the final plans and specifications of
[the subject contract], cause the completion of the transfer of its proposed building not later than 6 months from
registration of title of the property subject of [the subject June 29, 1994 and to complete construction of the
contract], from Edilberta N. Santos to their names, at
same within four years from December 31, 1991.
[petitioners’] own expense. Failure on the part of [petitioners]
to undertake the foregoing within the prescribed period
• It allowed putting up of commercial signs and
shall automatically authorize [respondents] to undertake advertisements over the area, which was prohibited.
the same in behalf of [petitioners] and charge the costs
incidental to the monthly amortizations upon due date. Ortigas prayed for the reconveyance of the subject property, or
alternatively, for the demolition of the structures and
A plain reading provides that petitioners failed to perform the improvements thereon plus penalties and costs.
transfer within the said period, but this does not constitute a
substantial breach. The paragraph provides a contractual RTC. Dismissed the complaint. Amethyst was supposed to
recourse in the event of nonperformance and that is to cause finish construction on December 31, 1995 but up to the time
such transfer in behalf and at the expense of petitioners. the property was transferred to ASB on December 28, 1996,
Ortigas never initiated any action against Amethyst to enforce
Theory of the Case, Principle said provision. Making him guilty of laches or negligence on
When a party deliberately adopts a certain theory and the case such action. CA. Affirmed RTC. Ortigas can no longer enforce
is decided upon that theory in the court, he will not be the said restrictions against ASB for the vendee was Amethyst.
permitted to change the same on appeal, because to permit
him to do so would be unfair to the adverse party. CA MR. It reversed its decision stating that it is not disputed
that Amethyst failed to finish construction within the
In the case: The court cannot grant the petitioners’ prayer in period stated the prescriptive period under a Deed of Sale is
the petition to order the cancellation of the contract and the ten years and they had until 31 December 2005 and that Ortigas
forfeiture of the payments because they neither prayer for this filed the present complaint on 07 July 2000 within such period.
specific relief nor argued that they were entitled to such
and did not provide such for defense. Whether or not Ortigas validly rescinded the Deed of Sale due
to the failure of Amethyst and its assignee, the petitioner ASB,
ASB REALTY v. ORTIGAS (2015) to fulfill the covenants of the Deed of Sale.

Facts: On June 29, 1994, respondent Ortigas entered a Deed of Ortigas’ Action for Rescission Could Not Prosper
Sale with Amethyst Pearl Corporation involving a parcel of land Ortigas never took to task such other buyers and Amethyst for
with an area of 1,012 sq.m. in Oranbo, Pasig City for the failing to construct the buildings within the periods
consideration of P2,024,000. Pertinent parts provide: contractually imposed. It maintains, therefore, that Ortigas
• Building constructed be reinforced concrete, cement slept on its rights because it did not take any action against
hollow blocks and shall be of the following height of Amethyst during the period prescribed in the Deed of Sale.
not more than 14 storeys plus one penthouse.
• Final plans and specifications of said building be Allegation on ASB as Amethyst’s Assignee
submitted to Ortigas for approval not later than six Petitioner Ortigas argues in its right to rescind that the
months from the date thereof. Should object, it shall petitioner was bound by the covenants of the Deed of Sale
notify and specify in writing the amendments required annotated in the name of the petitioner; and that the
to perform with its buildings and submit the amended petitioner’s privity to the Deed of Sale was by virtue of its
plans within 60 days from receipt of notice. being the successor-in-interest or assignee of Amethyst.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 46

Examination of Agreement: The Deed of Assignment in There is still no express or implied indication that the petitioner
Liquidation executed between Amethyst and ASB expressly had assumed Amethyst’s obligations. In short, the burden to
stated that “the assignor hereby assigns, transfers and conveys perform the covenants under the Deed of Sale, or the liability
unto the assignee one parcel of property”. for the nonperformance thereof, remained with Amethyst.
• This indicates that the transfer was only the tangible
asset consisting the piece of land and by no means did Propriety of Rescission under Article 1191
Amethyst assign the right or duties it has assumed Based on the foregoing, Ortigas’ complaint predicated on
under the Deed of Sale. Article 1191 of the Civil Code. It is proper if one of the parties
• ASB Realty became vested with rights of ownership commits a substantial breach of its provisions. It abrogates the
free from any lien or encumbrance. contract from its inception and requires mutual restitution of
the benefits received.
Doctrine of Estoppel, Recognition of Transfer
On the Allegation the “No Transfer Stipulation”. Ortigas In the case: Ortigas did not have a cause of action against the
apparently recognized without any reservation the issuance petitioner for the rescission of the Deed of Sale. Under Section
of the new certificate of title and the subsequent transfer by 2, Rule 2 of the Rules of Court elements of cause of action:
assignment from Amethyst to ASB leading to a new certificate 1. Right in favor of the plaintiff
of title. As such, Ortigas was estopped from assailing the 2. Obligation of defendant not to violate such right
petitioner’s acquisition and ownership of the property. 3. An act or omission constituting a breach of such
The second and third elements were absent in this case. Simply
The application of estoppel was appropriate. The doctrine of because ASB Realty is not privy to the Deed of Sale because
estoppel was based on public policy, fair dealing, good faith it was not the party obliged thereon.
and justice, and its purpose is to forbid a party to speak against • Not having come under the duty not to violate any
his own act or omission, representation, or commitment to the covenant in the Deed of Sale when it purchased the
injury of another who relied thereon. subject property despite the annotation, its failure to
comply with the covenants did not constitute a breach
On the Performance Required from the Assignee of contract.
TCT No. PT-10597 bound the petitioner but not to the extent
that rendered the petitioner liable for the nonperformance of • It was Amethyst that defaulted on the covenants,
the covenants stipulated in the Deed of Sale. hence the action to enforce such provisions of the
• Section 39 of The Land Registration Act requires contract or to rescind the contract should be against
that every person receiving a certificate of title in Amethyst.
pursuance of a decree of registration, and every
subsequent purchaser of registered land who takes a Rescission could not anymore take place against the petitioner
certificate of title for value in good faith shall hold the once the subject property legally came into the juridical
same free of all encumbrances except as those noted possession of the petitioner who was a third party to the
on said certificate. Annotation are to charge the Deed of Sale.
purchaser or title holder with notice of such burdens.
Right not absolute. Rescission will not be permitted for a slight
In the case: By acquiring the parcel of land with notice of the or causal breach, it shall be only for substantial or fundamental
covenants in the Deed of Sale, ASB bound itself to acknowledge ones as to defeat the object of the parties in agreement.
and respect the encumbrance. But it did not step into the
shoes of Amethyst as a party in the Deed of Sale. Thus, the Limitations or Restrictions of Power to Rescind
annotation of the covenants contained in the Deed of Sale did 1. Due process must be observed.
not give rise to a liability on the part of ASB as the purchaser or 2. It is subordinated to the rights of third persons who
successor-in-interest without its express assumption of such acquired the thing in good faith.
duties or obligation. 3. Injured party must respect the power of the court to
fix period in lieu of rescission.
Burden to Perform Covenants of 4. Evidence is needed to justify rescission.
Deed of Sale Remained with Amethyst 5. Slight breach will not justify it should be substantial as
Contractual obligations, unlike rights or benefits are generally to defeat the object of parties in agreement.
not assignable. But there are recognized means by which
obligations may be transferred, like sub-contract or novation. Effects of Rescission
• Extinguishes Obligatory Relation
In the case: The following shows that the assignment is not a The exercise of the power to rescind under Article 1191 has the
novation to transfer such: (1) The substitution of the petitioner effect as if the obligatory relation has never existed having a
did not result in the novation for novation requires consent of retroactive effect. It has the effect of abrogating the contract in
the vendor. (2) Petitioner did not expressly assume obligations all parts and the parties will be brought back to status quo
of Amethyst. (3) The consent of the new obligor (ASB) which before they entered the contract. Hence the need for parties for
was essential to novation was not obtained. restitution.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 47

• Obligation for Mutual Restitution


Hence the need for parties for restitution for it has been
contemplated that the relations shall be as if there was no
obligatory relation at all. However, it can be stipulated that
damages may be recovered in case of breach or if the parties
entered the agreement in bad faith.

Inapplicability of Article 1191


1. Obligations of sales of real property by installments
since RA 6552 of Maceda Law governs.
2. Sales of personal property by installment (RA 1484)
3. Contract of partnerships
4. Contract of Lease

When Judicial Approval is Not Required for Rescission


1. Express stipulation of automatic rescission.
2. When the debtor voluntarily returned the thing even
before judicial approval.

Waiver of the Right to Rescind under Article 1191


Contracting parties may waive the same. For example, when the
parties in a contract of sale subsequently execute a document
stipulating herein that the land sold to the vendee shall stand as
security for the payment of the balance of the purchase price, this
stipulation is incompatible with the idea of rescission of the
sale and therefore amount to a waiver of right.
• The vendor has already chosen the remedy of specific
performance or simple collection of a debt.
• Acceptance by the creditor of the delayed payment
amount to a waiver of the right of rescission.

ARTICLE 1192
In case both parties have committed a breach of the
obligation, the liability of the first infractor shall be equitably
tempered by the courts. If it cannot be determined which of
the parties first violated the contract, the same shall be
extinguished, and each shall bear his own damages.

NOTE: Where both parties are in default, their respective


liability for damages shall offset equitably.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 48

OBLIGATIONS AND CONTRACTS 2. Legal – a period fixed by law


Civil Code Voluntary or Conventional – stipulated by the parties
Judicial – allowed by the court.
Articles 1193-1230

SECTION 2 – OBLIGATIONS WITH A PERIOD 3. Express – when specifically stated


Tacit – when the person undertakes to do some work
ARTICLE 1193 which can be done only in a season.
Obligations whose fulfillment a day certain has been fixed,
shall be demandable only when that day comes. 4. Original – the stipulated period
Period of Grace – which is an extension fixed by the
Obligations with a resolutory period take effect at once but
parties themselves or by the court.
terminate upon arrival of the day certain.

A day certain is understood to be that which must necessarily 5. Definite – a fixed known date or time
come, although it may not be known when. Indefinite – an event which will necessarily happen
but the date of happening is unknown.
If the uncertainty consists in whether the day will come or
not, the obligation is conditional and it shall be regulated by On Uncertainty of Date
the rules of the preceding Section.
It does not convert the period into a condition, so long as there
is no uncertainty as whether it will happen or not.
Period or Term
• When the period is fixed at ‘on or about’ a given date,
It is a space of time which, exerting an influence on obligations
this means only a few days before or a few days after
because of a juridical act suspends their demandability or
the stated date, but not a remote date or one fixed by
determines their extinguishment.
the obligor.
Condition Period
Examples of Indefinite Period
As to their fulfillment
• Death of a person
Condition is an uncertain Term is an event that must
• Movable religious holidays like Holy Thursday
event necessarily come, whether
• Events in civil or political like age of majority or when
on a date known before
a person decides to become a qualified voter.
hand or at a time which
cannot be predetermined.
Effect of Period
As to their influence on the obligation
Obligations with a term are demandable only when the day
Condition gives rise to an A period has no effect upon fixed for their performance arrives. Thus, in action for the
obligation or extinguishes the existence of obligation, recovery od debts payable in installments, those not yet due
one already existing. but only the demandability and payable cannot be demanded from the complainant.
or performance. Unless • The right of action arises only when the date fixed has
specially agreed, it does not arrived, hence the period of prescription must also be
have any retroactive effect. counted only from such date of maturity and not from
As to time the date of obligation.
Condition may refer to a Period always refers to the • Once the stipulated date arrives, the obligation can be
past event unknown to the future. enforced, and the obligor who alleges an extension
parties. must show satisfactory evidence for such.
As to will of debtor
A condition which depends A period left to the debtor’s Action for Immediate Enforcement of Obligation
exclusively on the will of the will merely empowers the If the contract in which the terms imposed are:
debtor annuls the court to fix such period. a. cancelled by agreement of the parties, or;
obligation. b. when the non-fulfillment o the terms of the contract
resolves the period, and authorizes the creditor for
Different Kinds of Terms or Periods performance.
1. Suspensive or Ex Die – from a day certain, it is one The obligation is converted to a pure obligation.
that must lapse before the performance of the
obligation can be demanded. Performance of the ARTICLE 1194
obligations begins only from a day certain, upon In case of loss, deterioration or improvement of the thing
arrival of the period before the arrival of the day certain, the rules in Article 1189
shall be observed.
Resolutory or In Diem – to a day certain, it is the
Application of Article 1189
period after which the performance must terminate.
This provision provides that the rules on loss, deterioration and
Termination of the performance of obligation upon
improvements under conditional obligations applies under
the arrival of the said period.
obligations with a period.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 49

ARTICLE 1195 In Contracts of Loan


Anything paid or delivered before the arrival of the period, If gratuitous or without interest, the term is for the exclusive
the obligor being unaware of the period or believing that the benefit of the debtor, who may pay in advance of the period.
obligation has become due and demandable, may be
• If interest is stipulated, the period is generally for the
recovered with the fruits and interests.
benefit of both parties, and the debtor cannot pay in
NOTE: Only applies to obligations to give. advance against the will of the creditor, unless he pays,
the full interest for the period agreed upon.
Effect of Arrival of Term
This allows recovery of the thing or money itself, plus the fruits Waiver by Creditor
and interests, which must be understood as those accruing The acceptance of the partial payment in the mortgage contract
from the moment of the payment to the date of recovery. where it was provided that the debtor cannot pay the principal
• If the action to recover, however, is not brought by the before the expiration of the period of two years therein
debtor before the date of maturity, then the right to stipulated, was not a novation of the contract, but a waiver of
recover the thing or money will cease the creditor of the term of two years.
• It was a relinquishment of his right to refuse any
Right to Interests and Fruits payment before the expiration of said term.
This allows the debtor to recover fruits and interests in all cases
ARTICLE 1197
where he paid under a mistake as to the period. This is akin to
If the obligation does not dix a period, but from its nature and
the concept of solutio indebiti or payment of what is not due.
the circumstances it can be inferred that a period was
intended, the courts may fix the duration thereof.
No Recovery of Interests and Fruits
1. Reciprocal obligations and premature performance of The courts shall also fix the duration of the period when it
both creditor and debtor. depends upon the will of the debtor.
2. When the obligation is a loan on which the debtor is
bound to pay interest. In every case, the courts shall determine such period as may
under the circumstances may have been probably
3. When the period is exclusively for the benefit of the
contemplated by the parties. Once fixed by the courts, the
creditor, because the debtor by paying in advance period cannot be changed by them.
loses nothing.
When the Court May Fix Period
Payment with Knowledge of the Term 1. When the duration depends on the will of the debtor
As a presumption, the debtor knows of the period and that 2. When although the obligation does not fix a period, it
obligation is not yet due, Thus, the debtor shall have the burden can be inferred that a period was intended.
of proof proving ignorance of such.
When the Court May Not Fix Period
If the payment was made voluntarily, with the knowledge of the 1. When no term was specified because no term was ever
period, the payment cannot be recovered. The debtor can be intended.
considered to have tacitly waived the benefit of the term. 2. When the obligation is payable on demand
Hence, he is not entitled to recover anything for then the 3. When specific periods are provided for in the law
obligations are considered matured. 4. When what appears to be a term is a condition
5. When period to ask the court to fix prescribe (10)
ARTICLE 1196
Whenever in an obligation a period is designated, it is ARTICLE 1198
presumed to have been established for the benefit of both The debtor shall lose every right to make use of the period:
creditor and debtor, unless from the tenor of the same or 1. When after the obligation has been contracted, he
other circumstance it should appear that the period has been becomes insolvent, unless he gives a guaranty or
established in favor of one of the other. security for the debt;
2. When he does not furnish to the creditor the
Benefit of Term guaranties or securities which he has promised;
As presumed, the term is for the benefit of the two parties and 3. When by his own acts he has impaired said
if such happens, the creditor cannot demand payment and the guaranties or securities after their establishment,
debtor cannot make an effective tender and consignation of and when through fortuitous event they disappear,
payment, before the period is stipulated. unless he immediately gives new ones equally
satisfactorily;
• If it is for the benefit of the creditor only, he may
4. When the debtor violates any undertaking, in
demand performance at any time, but the debtor consideration of which the creditor agreed to the
cannot compel him to accept payment before the period.
period expires. 5. When the debtor attempts to abscond.
• If for the benefit of the debtor, he may oppose a
premature demand for payment, but may validly pay NOTE: Insolvency referred does not require a judicial
any time before the period expires. declaration. It is sufficient for him to fin a hard time paying off
his obligations due to his financial reserves.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 50

SECTION 3. – ALTERNATIVE OBLIGATIONS Creditor’s Consent


The law does not require the other party to consent to the
ARTICLE 1199 choice made by the party entitled to choose. A mere
A person alternatively bound by different prestations shall
declaration of choice, communicated to the other party, is
completely perform one of them.
sufficient. To require such would destroy the alternative
The creditor cannot be compelled to receive part of one and character of the obligation itself.
part of the other undertaking.
Requisites of Selection of Choice
Obligations with Several Objects 1. Made properly so that the creditor or agent know
An alternative obligation is one where out of the two or more 2. Made with full knowledge that selection is being made
prestations that may be given only one is due. 3. Made voluntarily and freely
1. Conjunctive 4. Made in due time and before maturity
2. Alternative 5. Made to all the proper persons
3. Facultative 6. Made without conditions unless agreed
7. May be waived
Alternative Facultative
The characteristics of Only one thing is due, but ARTICLE 1202
alternative obligations is the debtor has reserved the The debtor shall lose the right of choice when among the
that, several objects being right to substitute it with prestation whereby he is alternatively bound, only on is
practicable.
due, the fulfillment of one is another.
sufficient, determined by
Obligation Becomes Simple
the choice of the debtor
If all the prestation, except one, are impossible or unlawful, it
who generally has the right
follows that the debtor can choose and perform only that one.
of election
The obligation cases to be alternative, and is converted into a
Loss of one thing affects the Loss of that which may be simple obligation to perform the only feasible or practicable
obligation. given as substitute doe s prestation. The impossibility however, must not be due to the
not affect the obligation. creditor’s acts.
Election may be granted to Never granted to the
the creditor. creditor. ARTICLE 1203
Loss of one of the things in Loss of that which is due as If through the creditor’s act the debtor cannot make a choice
alternative obligations does the object of the obligation according to the terms of the obligation, the latter may
not extinguish the will extinguish such rescind the contract with damages.
obligation. obligation.
Impossibility Due to the Creditor
ARTICLE 1200 There is option to rescind the contract with damages, but he
The right of choice belongs to the debtor, unless it has been may also elect to perform that which remains or to elect those
expressly granted to the creditor. remaining. Rescission does not take place automatically.

The debtor shall have no right to choose those prestation ARTICLE 1204
which are impossible, unlawful or which could not have been The creditor shall have a right to indemnity for damages
the object of the obligation. when, through the fault of the debtor, all the things which are
alternatively the object of the obligation have been lost, or
Limits on Election the compliance of the obligation has become impossible.
The right to choose is indivisible. The debtor cannot choose
part of one prestation and part of another. The indemnity shall be fixed faking as a basis the value of the
• Unlawful last thing which disappeared, or that of the service which last
became impossible.
• Impossible
• Could not have been object of the obligation Damages other than the value of the last thing or service may
The judgment is termed in an alternative form demanding also be awarded.
either object A or object B, at the election of the debtor.
Loss by Fault of Debtor
ARTICLE 1201 This article applies to cases in which the debtor has the right to
The choice shall produce no effect except from the time it has choose. If only some of the prestation are rendered impossible,
been communicated.
the fault of the debtor does not make him liable for damages,
Means of Communication to the Other Party because he can still comply with the obligation by performing
1. Oral any of the prestation remaining.
2. Written
3. Implied He will become liable for damages under the terms of this
4. Express article only when all the prestations become impossible
through his fault.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 51

Effect of Fortuitous Event ARTICLE 1206


If all the prestations become impossible due to fortuitous When only one prestation has been agreed upon, and the
event, the obligation is extinguished; the debtor is not liable for obligor may render another in substitution, the obligation is
called facultative.
damages.
The loss or deterioration of the thing intended as a
If more of prestations were lost by fault but the last remaining substitute, through the negligence of the obligor, does not
one by fortuitous event the debtor is liable under the present render him liable. But once the substitution has been made,
article, but the basis of damages will be the value of the last the obligor is liable for the loss of the substitute on account
prestation which become impossible through his fault. of his delay, negligence or fraud.
• The negligence or fault of the debtor has diminished
the possibility of the performance of the obligation, Distinction of Alternative from Facultative
and if he had exercised due diligence to the prestation Alternative Facultative
the obligation could have been complied with. As to contents of the obligation
There are various Only the principal prestation
ARTICLE 1205 prestations all of which constitutes the obligation,
When the choice has been expressly given to the creditor, the constitute parts of the accessory being only a
obligation shall cease to be alternative from the day when obligation. means to facilitate payment.
the selection has been communicated to the debtor.
Creditor must demand all Creditor can only demand
Until then the responsibility of the debtor shall be governed
by the following rules: the prestations in the the principal prestation.
(1) If one of the things is lost through a fortuitous event, alternative.
he shall perform the obligation by delivering that As to nullity
which the creditor should choose from among the The nullity of one does not The nullity of the principal
remainder, or that which remains if only one invalidate the obligation, prestation invalidates the
subsists; which is still in force. obligation and the creditor
(2) If the loss of one of the things occurs through the
cannot demand the
fault of the debtor, the creditor may claim any of
those subsisting, or the price of that which, through substitute even when valid.
the fault of the former, has disappeared, with a right As to choice
to damages; The right to choose may be Only the debtor can choose
(3) If all the things are lost through the fault of the given to the creditor. the substitute prestation.
debtor, the choice by the creditor shall fall upon the As to effect of loss
price of any one of them, also with indemnity for
Only the impossibility of all The impossibility of the
damages;
The same rules shall be applied to obligations to do or not to the prestations without fault principal obligation is
do in case one, some or all prestations should become of the debtor extinguishes sufficient to extinguish the
impossible. the obligation. obligation, even if the
substitute is possible.
Selection by Creditor
When the creditor has the right to choose, his selection takes Loss of Substitute
effect from the moment it is communicated to the debtor. The Before the substitute is effected, the substitute is not the
selection by the creditor may be made expressly or tacitly. prestation that is due, only the principal prestation is due and
• Tacit selection is when creditor accepts the prestation enforceable by the creditor at that time.
offered, or brings an action for the enforcement of one • Therefore, if the substitute prestation becomes
of the prestations. impossible due to the fault or negligence of the
debtor, the obligation is not affected, and he cannot
Effect of Creditor’s Delay be held for damages.
• He cannot hold the debtor in default for the latter
does not know what to deliver. Option to Perform
• Even if there is a definite period for fixed performance, The option to perform the substitute prestation is exclusively
there will only be default or delay on the part of the dependent on the will of the debtor, he cannot be compelled
obligor only when the obligation is now simple due to to perform it if the principal prestation becomes impossible.
the exercise of the selection by the creditor. • If the impossibility of the principal prestation is due to
• He may petition the court to compel the creditor to his fault, he may be held liable for damages, he cannot
accept the prestation offered to relieve him from the be compelled to perform the substitute prestation. It
obligation, with damages. is a matter of absolute choice on his part.
• If the creditor does not make selection in period fixed,
the debtor’s duty to perform does not arise because When Substitution Effective
the prestation to perform has not been determined. From the time the debtor communicates to the creditor that he
The creditor in such case shall be considered by his elects to perform the substitute prestation. From this, it is the
own inaction to have waived the period. only due. Also in fortuitous events it is now simple.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 52

SECTION 4. – JOINT AND SOLIDARY OBLIGATIONS Effects of Joint Liability


The principal consequences of the joint character of the
ARTICLE 1207 obligation are as follows:
The concurrence of two or more creditors or of two or more
1. The demand by one creditor upon one debtor,
debtors in one and the same obligation does not imply that
each one of the former has a right to demand or that each one produces the effects of default only with respect to the
of the latter is bound to render, entire compliance with the creditor who demanded and the debtor whom the
prestation. There is a solidary liability only when the demand was made but not with respect to the others.
obligation expressly so states, or when the law or the nature 2. The interruption of prescription by the judicial
of the obligation requires solidarity. demand of one creditor upon a debtor, does not
benefit the other creditors nor interrupt the
ARTICLE 1208
prescription as to other debtors.
If from the law, or the nature or the wording of the
obligations to which the preceding article refers the contrary 3. The vices of each obligation arising from the personal
does not appear, the credit or debt shall be presumed to be defect of a particular debtor does not affect the
divided into as many equal shares as there are creditors or obligation or rights of the others.
debtors, the credits or debts being considered distinct from 4. Insolvency of a debtor does not increase the
one another, subject to the Rules of Court governing the responsibility of his co-debtors, nor does it authorize
multiplicity of suits. a creditor to demand anything form his co-creditors.
5. In joint divisible obligation, the defense of res judicata
Joint Obligation (mancommunada or pro rata) is not extended from one debtor to another.
It is on in which each of the debtors is liable only for a
proportionate part of the debt, and each creditor is entitled ARTICLE 1209
only to a proportionate part of the credit. Creditor can recover If the division is impossible, the right of the creditors may be
only his share of the obligation, and each debtor can be made prejudiced only be their collective acts, and the debt can be
to pay only his part. enforced only be proceeding against all debtors. If one of the
latter should be insolvent, the others shall not be liable for
Solidary Obligation (several or in solidum) his share.
It is one in which each debtor is liable for the entire obligation,
Joint Indivisible Obligations
and each creditor is entitled to demand the whole obligation.
When there are several debtors or creditors, but the prestation
Each creditor may enforce the entire obligation, and each
is indivisible like a house, the obligation is joint unless solidarity
debtor may be obliged to pay it in full.
is stipulated. Considered as midway of joint and solidary:
• No creditor can do an act prejudicial to others, and no
Example: “We promise to pay” without any express words
debtor can be made to answer for co-debtors.
signed by two is pro rata, a statement of “I promise to pay” with
• Fulfillment requires the concurrence of all the debtors
two signees is a solidary responsibility.
although each for his part.
Joint Character, Presumed
Plurality of Debtors
When two persons are liable under a contract, and no words
The indivisible can be performed by them only by acting
appear in the contract or the judgment to make each liable for
together. Hence all must be sued. If any of the debtors is not
the entire obligation, the presumption is that their obligation is
willing to perform, the prestation is converted to indemnity
joint or mancommunada, and each debtor is liable only for a
then it becomes divisible and creditors can sue the debtors
proportionate part of the obligation.
separately for their respective shares.
Exceptions to the Presumption
Plurality of Creditors
1. When there is a stipulation in the contract that the
If there are several creditors a delivery to one of them is
obligation is solidary.
prejudicial to other creditors unless authorized. If only or some
2. When the nature of the obligation requires liability to
of the creditors demand the prestation, the debtor may legally
be solidary.
refuse, or he can insist all the creditors to receive the thing and
3. When the law declares so.
that if some creditor refuses, the debtor may deposit the thing
in court by consignation.
Examples when Law Imposes Solidary Liability
• In non-performance by the debtor, obligation to pay
1. Obligations arising from Torts
damages arises then the prestation becomes divisible
2. Quasi-Contracts
and each creditor can recover separately.
3. Legal provisions on legatees and devisees
4. Liabilities of principals, accomplices and accessories in
ARTICLE 1210
a felony The indivisibility of an obligation does not necessarily give
5. Bailees in commodatum rise to solidarity. Nor does solidarity itself imply
indivisibility.
NOTE: There may plurality of creditors, or plurality of debtors.
There can also be plurality on both debtors and creditors. NOTE: Solidarity for parties, divisibility for subject matter.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 53

ARTICLE 1211 ARTICLE 1216


Solidarity may exist although the creditors and debtors may The creditor may proceed against any one of the solidary
not be bound in the same manner and by the same periods debtors or some or all of them simultaneously. The demand
and conditions. made against one of them shall not be an obstacle to those
which may subsequently be directed against others, so long
Kinds of Solidarity as the debt has not been fully collected.
1. Active – on the part of creditors or obligees
2. Passive – on the part of the debtors or obligors Actions Based on Solidarity
3. Mixed – both The solidary debtors may be sued simultaneously in one suit or
4. Conventional – agreed by the parties successively in different actions. The provisions of this article
5. Legal – opposed by law. however, are not of public interest. The parties therefore, may
validly stipulate that the solidary debtors can only be sued
ARTICLE 1212 simultaneously, or provide an individual order.
Each one of the solidary creditors may do whatever may be
useful to the others but no anything which may be prejudicial Judgment as Regards to Creditors
to the latter. If the judgment is favorable to the creditor Article 1212
provides that this inures to the benefit of the co-creditors. But
ARTICLE 1213
if the judgment is adverse to a solidary creditor can be set-up
A solidary creditor cannot assign his rights without the
consent of the others. against the co-creditors in subsequent actions unless it is
founded on personal cause.
ARTICLE 1214
The debtor may pay any one of the solidary creditors; but if Judgment as Regards to Debtors
any demand, judicial or extrajudicial has been made by one If the judgment is favorable to the creditor but the debtor is
of them, payment should be made to him. insolvent, Article 1216 provides that the other debtors can still
be sued until the debt is fully paid. The judgment against one
Demand and Mutual Representation
debtor cannot be enforced, there must be a new action.
The solidary creditors are mutual representatives of each other
for demanding payment. The equality of rights of the solidary ARTICLE 1217
creditors by virtue of this mutual representation lasts only until Payment made by one of the solidary debtors extinguishes
one of them goes ahead and sues the debtor. the obligation. If two or more solidary debtors offer to pay,
• If there are several demands, the debtor should pay to the creditor may choose which offer to accept.
the one who first notified him, if together at the same
time the debtor can choose. He who made the payment may claim from his co-debtors
only the share which corresponds to each, with the interest
for the payment already made. If the payment is made before
ARTICLE 1215
the debt is due, no interest for the intervening period may be
Novation, compensation, confusion or remission of the debt,
demanded.
made by any of the solidary creditors or with any of the
solidary debtors, shall extinguish the obligation, without
When one of the solidary debtors cannot, because of his
prejudice to the provisions of Article 1219.
insolvency, reimburse his share to the debtor paying the
obligation, such share shall be borne by all his co-debtors, in
The creditor who may have executed any of these acts, as
proportion to the debt of each.
well as he who collects the debt, shall be liable to the others
for the share in the obligation corresponding to them.
Payment by a Solidary Debtor
Definition of Concepts Payment by one of the solidary debtors releases all co-debtors
• Novation – modification of an obligation by changing from the creditor. In case of partial payments, he can recover
its object or principal conditions or by substituting the reimbursement from the co-debtors only in so far as his
person of the debtor like subrogation. payment exceeded his share of the obligation.
• Compensation – is that which takes place in their own
right, are creditors and debtors of each other Reimbursement
• Merger – Which takes place when the characters of When a solidary debtor pays the entire obligation, the resulting
creditor and debtor are merged in the same person. obligation of the co-debtors to reimburse him is joint. If one, by
• Remission or Waiver – The act of liberality whereby a insolvency cannot pay his share in the reimbursement, the
creditor condones the obligation of the debtor; that others shall bear such share proportionately.
where the creditor tells the debtor to “forget about the
ARTICLE 1218
whole thing.”
Payment by a solidary debtor shall not entitle him to
reimbursement from his co-debtors if such payment is made
Effects of Article 1215 after the obligation has prescribed or become illegal.
Any of thee acts shall extinguish the obligation (no suit), except
for novation. Among co-creditors, the act of any of them does NOTE: It is no longer due, he can no longer recover under the
not prejudice the rights of other creditors to recovery. same contract but under quasi-contract rules.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 54

ARTICLE 1219 • Non-performance of the suspensive condition or non-


The remission made by the creditor of the share which arrival of the suspensive period.
affects one of the solidary debtors does not release the latter • Payment or remission
from his responsibility towards the co-debtors, in case the
• All other means of defense.
debt had been totally paid by anyone of them before the
remission was effected.
Defenses Personal to the Defendant
Application This would include minority, insanity, fraud, violence or
This refers to a case where a co-debtor has already paid the intimidate. But if the personal defense takes the form of special
obligation in full when the remission was made. To exempt such terms or conditions affecting his part of the obligation, he may
would be fraud. In fact, the obligation is already extinguished utilize such only to his part.
by payment or performance thus remission is useless.
SECTION 5. – DIVISIBLE AND INDIVISBLE OBLIGATIONS
ARTICLE 1220
The remission of the whole obligation, obtained by one of the ARTICLE 1223
solidary debtors, does not entitle him to reimbursement The divisibility or indivisibility of the things that are the
from his co-debtors. object of obligations in which there is only one debtor and
only one creditor does not alter or modify the provisions of
ARTICLE 1221 Chapter 2 of this Title.
If the thing has been lost or if the prestation has become
impossible without the fault of the solidary debtors, the Divisibility of Things
obligation shall be extinguished. Juridically a thing is considered indivisible, when if divided the
value is diminished disproportionately. On the other hand, a
If there was fault on the part of any one of them, all shall be thing is divisible when each one of the parts into which it is
responsible to the creditor, for the price and the payment of divided forms a homogenous and analogous object to the
damages and interest, without prejudice to their action
other parts as well as to the thing itself.
against the guilty or negligent debtor.
(a) Qualitative
If through a fortuitous event, the thing is lost or the (b) Quantitate
performance has become impossible after one of the solidary (c) Ideal or moral
debtors has incurred in delay through the judicial or
extrajudicial demand upon him by the creditor, the Divisible Indivisible
provisions of the preceding paragraph shall apply. Susceptible of partial It cannot be validly
performance and that the performed by parts. It is not
Limited to Loss of Thing
debtor can legally perform capable of partial
It has a limited application, if the loss or impossibility is due to
the obligation by parts and fulfillment.
(1) Fault of any of the solidary debtors
the creditor cannot demand
(2) Fortuitous event after a debtor has incurred in delay
a single performance of an
The obligation is converted into an obligation to pay indemnity,
entire obligation.
consisting of the price, damages and interest.
ARTICLE 1224
ARTICLE 1222
A joint indivisible obligation gives rise to indemnity for
The solidary debtor may, in actions filed by the creditor,
damages from the time anyone of the debtors does not
avail himself of all defenses which are derived from the
comply with his undertaking. The debtors who may have
nature of the obligation and of those which are personal to been ready to fulfill their promises shall not contribute to the
him, or pertain to his own share. With respect to those which indemnity beyond the corresponding portion of the price of
personally belong to the others, he may avail himself thereof the thing or of value of the service in which the obligation
only as regards that part of the debt for which the latter are consists.
responsible.
Joint Indivisible Obligation
Defenses of the Solidary Debtor
In cases of non-performance of any of the creditors, the
1. Defenses inherent by the nature of obligation
obligation is converted into a liability for losses and damages
2. Defenses personal to the debtor-defendant
which is divisible. In this case, if one of the debtors is insolvent
3. Defenses personal to other solidary debtors
or fails to pay his share, the others will not be liable for his share.
• The debtors who are ready to perform their part do
Defenses Inherent in Obligation
not become liable for more than the portions
These are derived from the vinculum juris existing between:
respectively corresponding to them in the price of the
• Non-existence of obligation due to it being illicit or
subject matter of the obligation, the obligation is
being absolutely simulated.
transformed but not increased.
• Nullity due to the defect in capacity or consent of all
the debtors like mistake, fraud or violence.
Indivisible Solidary Obligations. Every debtor is liable for losses
• Unenforceability because of lack of proper proof
and damages, although those ready to perform can later
recover from the guilty one.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 55

ARTICLE 1225 Condition Penalty


For the purposes of the preceding articles, obligations to give Not an obligation Obligation although an
definite things and those which are not susceptible of partial
accessory
performance shall be deemed to be indivisible.
Never demandable Demandable in default of
When the obligation has for its object the execution of a the unperformed principal
certain number of days of work, the accomplishment of work obligation and sometimes
by metrical units, or analogous things which by their nature jointly with it.
are susceptible of partial performance, it shall be divisible.
Example:
However, even though the object or service may be
A promised to construct the house of B within 80 days. In the
physically divisible, an obligation is indivisible if so provided
by law or intended by the parties. contract, there is a provision to the effect that for every day’s
delay after the stipulated 80 days, A would pay a fine or
In obligation not to do, divisibility or indivisibility shall be penalty of P10,000. If the house is constructed finally at the
determined by the character of the prestation in each end of 85 days, A would have to pay a penalty of P50,000.
particular case.
NOTE: The penal clause gives A motive to finish the
Indivisible Divisible construction on time and that instead of computing the legal
1. Obligations to give 1. When the object is the rate of interest of damages, the matter has become simplified
definite things execution of a certain by inserting the penal clause, which in this case now assumes
2. Not susceptible to partial number of days work. the part of liquidated damages.
performance 2. When the object is the
3. If so provided by law, accomplish of work by The penalty takes place of indemnity for damages and the
even if divisible metrical units. payment of interest.
4. If so intended by the 3. When the purpose of the
parties, even divisible. obligation is to pay Q. Can any penalty be demandable?
certain amount in No. The penalty may be enforced only when it is demandable
installment. in accordance with the provisions of the Civil Code, one of
4. Susceptible of partial which states that the penalty may be reduced when iniquitous.
performance
Example. Failure to pay subsequent installments would forfeit
SECTION 6. – OBLIGATIONS WITH A PENAL CLAUSE installments already made. In such, even if the purchaser paid
already 8% of the total price. The penal clause does away with
ARTICLE 1226
In obligations with a penal clause, the penalty shall the duty to prove existence and measure of damages by breach.
substitute the indemnity for damages and the payment of
interests in cases of noncompliance, if there is no stipulation Penal Clause Facultative Alternative
to the contrary. Nevertheless, damages shall be paid if the Gloria is obliged to Gloria is obliged to Gloria is obliged to
obligor refuses to pay the penalty or is guilty of fraud in the give me a diamond give me a particular give me either a
fulfillment of the obligation. ring. If she fails to diamond ring. particular diamond
do so, she must However, if she so ring or P700,000.
The penalty may be enforced only when it is demandable in give P700,000. desires, she may
accordance with the provisions of this Code. instead give me
P700,000.
Penal Clause Ordinarily, Gloria Gloria is clearly and The choice given to
It is a coercive means to obtain from debtor compliance. It is an cannot excuse expressly allowed to Gloria is absolute,
accessory undertaking to assumes greater liability in case of herself from the make a substitution. however, if the ring
breach. Attached to an obligation to assure performance. It duty of giving the If the ring is lost by is lost by a
ring by simply a fortuitous event, fortuitous event,
constitutes an obligation although an accessory. It may become
paying P700,000. she is excused from she is still obliged
demandable in default of the unperformed principal obligation.
This must be giving P700K for the to give the
1. Legal expressly stated. principal is gone. P700,000.
2. Conventional or Voluntary
3. Subsidiary ARTICLE 1227
4. Joint The debtor cannot exempt himself for the performance of the
obligation by paying the penalty, save in the case where this
Instances When Additional Damages May be Recovered right has been expressly reserved for him. Neither can the
1. When it is expressly stipulated by the parties creditor demand the fulfillment of the obligation and the
satisfaction the penalty at the same time, unless this right
2. When the debtor refuses to pay the penalty imposed
has been clearly granted him. However, if after the creditor
in the obligation.
has decided to require the fulfillment of the obligation, the
3. When debtor is guilty of fraud or dolo in the fulfillment performance thereof should become impossible without his
of the obligation. fault, the penalty may be enforced.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 56

Right of Debtor amount of 100 because there has been partial or irregular
As a rule, the debtor cannot avoid performance of the principal performance and B has already benefited from such.
obligation by offering to pay the penalty. Therefore, the
penalty, the object of which is to secure compliance wit the ARTICLE 1230
obligation, cannot, as a general rule, serve as a defense for the The nullity of the penal clause does not carry with it that of
purpose of leaving the principal obligation unfulfilled. Unless the principal obligation.
this right is expressly reserved.
The nullity of the principal obligation carries with it that of
the penal clause.
Right of Creditor
The creditor cannot demand the principal obligation and the Effect of Nullity of a Penal Clause
penalty at the same time. But this can be done when the right If the principal obligation is null and void, the penal clause will
is clearly granted to him. have no more use for existence and is there ore also considered
null and void. On the other hand, just because the penal clause
Example. Diana promises to finish a piece of work within six is not valid, it does not mean that its nullity will also make the
months. The contract stipulates that in case she does not build principal obligation null and void. The principal obligation can
the house at all, he is supposed to forfeit the sum of P1M. stand alone, and the void penal clause be disregarded.

The contractor cannot just give the sum of P1M as substitute Example. A is obliged to construct a house for B within six
for the non-performance of his obligation. For the penal clause months. The contract provides for a penalty clause in case A is
is not supposed to substitute the performance of the principal not able to perform hiss obligation within the stipulated period.
obligation. He may, however, be expressly granted by the The penalty is “giving several boxes of shabu”. Here the penal
creditor the right to refrain from the execution of the contract clause is null and void for it is outside the commerce of man,
by a forfeiture of the penalty.

ARTICLE 1228
Proof of actual damages suffered by the creditor is not
necessary in order that the penalty may be demanded.

No Necessity of Proving Actual Damages


Penalty may be demanded without proving actual damages.
When a penal clause has been agreed upon in a contract more
as a punishment than a security, it is considered as a lawful
means for repairing losses and damages.

And upon evidence of the violation of the conditions stipulated,


the injured party is not obliged to prove losses and damages
suffered nor the extent of the same in order to demand the
enforcement of the penal clause agreed upon.

ARTICLE 1229
The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied
with by the debtor. Even if there has been no performance,
the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.

When Penalty Can be Reduced


1. When the obligation has ben partly complied with by
the debtor or partial performance.
2. When the obligation has been irregularly complied
with by the debtor or irregular performance.
3. When the penalty is iniquitous or unconscionable
even if there has been no performance at all.

Instance. A promise to deliver B 100 bottles of wine on a certain


day when a banquet will be held. The contract states that failure
of A to do so on the day will result in a forfeiture of P100,000.
On that day, A was able to deliver on 90 of the 100 bottles
promised. It is unfair now for B to exact the payment of the full
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 57

OBLIGATIONS AND CONTRACTS INDUSTRIAL MANAGEMENT v. NLRC (2000)


Articles 1193-1230
JURISPRUDENCE NOTES Facts: On September 1984, private respondents filed a
complaint wit the DOLERAB in Cebu against Filipinas Carbon
1207-1222. Joint and Solidary Obligations Mining Corporation and petitioner Industrial Management
Development Corporation (INIMACO) for payment of
separation pay and unpaid wages.
PACIFIC BANKING v. IAC (1991)

The Labor Arbiter ruled in favor of the private respondents,


Facts: On October 24, 1975, defendant Regala applied for and
absent appeal it became final and executory. Upon issuance of
obtained from the bank the issuance and use of Pacificard
Writ of Execution, it was returned unsatisfied. On 1987, the
credit card which was under the Terms and Conditions
labor arbiter issued an Alias Writ of Execution which ordered to
governing the Issuance and Use of Pacificard a copy of which
produce the award for the private respondents.
was issued to and received by the said defendant on the date
of the application and agreed on such.
On September 3, 1987, petitioner filed a Motion to Quash
Alias Writ of Execution and Set Aside Decision alleging
On the same date, Robert Regala executed a Guarantor’s
among others was that the alias writ of execution altered and
Undertaking in favor of the bank, whereby the latter agreed to
changed the tenor of the decision by changing the liability of
be jointly and severally of Celia Regala to pay the bank upon
respondents from joint to solidary by the insertion of and/or
demand any and all indebtedness incurred by Celia with the use
between respondents.
of the Pacificard or renewals thereof.

Whether or not the petitioners’ liability pursuant to the decision


The defendant Celia Regala, had purchased goods and/or
of the Labor Arbiter is solidary or not.
services on credit under her Pacificard for which the bank
advanced the cost of P92,803 at the time of the filing of the
Discussion: Upon examination of the pleadings, the Court finds
complaint. Celia failed to settle her account for the purchases,
that the liability of the petitioner is not solidary but merely joint
received a demand, and was sent to Robert the Guarantor.
and NLRC acted in GADALEJ in upholding such solidarity.
A complaint was filed against Celia for failure to settle her
Joint and Solidary Obligations, Joint Presumption
obligation. Robert Regala on the other hand admitted his
Well-entrenched is the rule that solidary obligation cannot
understanding as guarantor but limited to P2,000 per month.
lightly be inferred. There is a solidary liability only when the
obligation expressly so states, when the law so provides or
RTC. They are condemned jointly and severally to pay the
when the nature of the obligation so requires.
amount with interest plus 15% of principal obligation for costs.
IAC. Regala was made to be liable to only P2000 a month and
In the case: In the dispositive portion of the Labor Arbiter, the
only to the effectivity of the card.
word “solidary” does not appear. The said fallo expressly states
the following respondents therein as liable. Nor can it be
What should be the liability of Robert Regala as guarantor?
inferred therefrom that the liability of the six (6) respondents in
the case below is solidary, thus their liability should merely be
Guarantor’s Undertaking was a Contract of Surety
joint. When it is not provided in a judgment that the defendants
As distinguished from a contract of guaranty where the
are liable to pay jointly and severally a certain sum of money,
guarantor binds himself to the creditor to fulfill the
none of them may be compelled to satisfy in full said judgment.
obligation of the principal debtor only in case the latter
should fail to do so, in a contract of suretyship, the surety
When Decision is Final It Cannot be Amended or Altered
binds himself solidarily with the principal debtor.
It thereby becomes immutable and unalterable and any
amendment or alteration which substantially affects a final and
In the case: As a surety he bound himself jointly and severally
executory judgment is null and void for lack of jurisdiction,
with the debtor Celia Regala “to pay the Pacific Banking
including the entire proceedings held for that purpose. An
Corporation upon demand, any and all indebtedness,
order of execution which varies the tenor of the judgment or
obligations, charges or liabilities due and incurred by said Celia
exceeds the terms thereof is a nullity.
Syjuco Regala with the use of Pacificard or renewals thereof
issued in (her) favor by Pacific Banking Corporation.
In the case: None of the parties in the case before the Labor
Arbiter appealed the Decision dated March 10, 1987, hence the
Roberto, in fact, made his commitment as a surety a continuing
same became final and executory. Thus, the proceedings held
one, binding upon himself until all the liabilities of Celia Regala
for the purpose of amending or altering the dispositive portion
have been fully paid. All these were clear under the “Guarantor’s
of the said decision are null and void for lack of jurisdiction.
Undertaking” Roberto signed.
Alias Writ of Execution is void because it varied the tenor
• He was made aware of the terms and conditions and
of the final judgment against the petitioners making the
voluntarily agreed to be bound as surety.
liability solidary.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 58

MARIVELES SHIPYARD v. CA (2003) Article 108. Solidary Liability. The provisions of existing laws
to the contrary notwithstanding, every employer or indirect
Facts: October 1993, petitioner Mariveles engaged the service employer shall be held responsible with his contractor or
of the Longest Force Security Agency to render security services subcontractor for any violation of any provision of this Code.
at its premises. Pursuant to their agreement, Longest Force
deployed its security guards, the private respondents at its In the case: Mariveles Shipyard is an Indirect Employer, by
shipyard in Mariveles, Bataan. virtue of Article 107 pursuant to Article 106 of the Labor Code,
when the agency as contractor failed to pay the guards, the
According to petitioner, it religiously complied with the terms corporation (Mariveles) becomes jointly and severally liable for
of the security contract with Longest Force, promptly paying its the guards’ wages. This is mandated by the Labor Code.
bills and the contract rates of the latter. However, it found the
services being rendered by the assigned guards unsatisfactory Petitioner cannot evade liability by alleging that it paid
and inadequate, causing it to terminate its contract with religiously the compensation of guards under the contract with
Longest Force on April 1995. the security agency. Labor laws are considered written in
• In turn, Longest Force terminated employment of the every contract, stipulations thereof are considered null.
security guards it deployed at petitioner’s shipyard. • Employers cannot hide behind their contracts to
evade liability for noncompliance with such laws.
September 2, 1996, private respondents filed a case for illegal
dismissal, underpayment of wages against both petitioner and Reimbursement, Application
Longest Force praying for full back wages and without loss. The solidary liability of petitioner with Longest Force does not
preclude the application of the Civil Code provision on the right
Longest Force filed a cross-claim against the petitioner. Longest of reimbursement from his co-debtor by the one who paid.
Force admitted that it employed private respondents and
assigned them to such rendering 12 hours duty per shift and The security agency may not seek exculpation by claiming that
likewise admitted liability as to non-payment of the alleged the principal’s payments to it were inadequate for the guards’
wage differential amounting to P2,618,025 but passed on the lawful compensation. As an employer, the security agency is
liability to petitioner for the latter paid so lower than the charged with knowledge of labor laws; and the adequacy of the
prescribed rate contrary to law. compensation that it demands for contractual services is its
principal concern and not any others.
Mariveles Shipyard denied any liability, stressing that no
employer-employee relationship existed between it and the On Overtime Pay. Despite the alleged lack of proof thereof,
security guards. It further pointed out that it would be the suffice it to state that such involves a determination and
height of injustice to make it liable again for monetary claims evaluation of facts which cannot be done in a petition for
which it had already paid. review. Well established is the rule that in an appeal via
certiorari, only questions of law may be reviewed.
Labor Arbiter (NCR). It declared respondents Longest Force
and Mariveles Shipyard jointly and severally liable to pay the Held: Petitioner and Longest Force are held liable jointly and
money claims of complainants representing underpayment of severally for underpayment of wages and overtime pay of the
wages and overtime pay in the total amount of P2,700,623.40 security guards, without prejudice to petitioner’s right of
based on the PADPAO rates. NLRC affirmed in toto. reimbursement from Longest Force.

Should Mariveles Shipyard be a solidary judgment debtor CONSTRUCTION DEVELOPMENT v. ESTRELLA (2006)
together with Longest Force in this case?
Facts: On December 29, 1978, respondents Rebecca G. Estrella
Discussion: Petitioner argues that it should not be held jointly and her granddaughter Rachel boarded in San Pablo City, a
and severally liable with Longest Force for underpayment of BLTB bus bound for Pasay City. However, they never reached
wages and overtime pay because it had been paying religiously their destination because their bus was rammed behind by a
the bills for the security services sent by Longest Force. tractor-truck of CDCP in the South Expressway.

Petitioner’s Liability is Solidary Pursuant to The strong impact pushed forward their seats and pinned their
Articles 106, 107 and 109 of the Labor Code knees to the seats in front of them. They regained
Article 106. In the event that the contractor or subcontractor consciousness only when rescuers created a hole in the bus and
fails to pay the wages of his employees, the employer shall be extricated their legs from under the seats. They were brought
jointly and severally liable with his contractor or subcontractor. to Makati Medical Center where the doctors diagnose their
injuries as shown in the Medical Certificate.
Article 107. The provisions of Article 106 apply to any person or
corporation, indirect employer, contracts with an independent Thereafter, respondents filed a Complaint for damages against,
contractor for the performance of any work. CDCP, BLTB, Payunan, Jr. and Datinguinoo before RTC Manila
alleging negligence, failure to exercise diligence.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 59

RTC. CDCP and BLTB and their employees are found to be liable YULIM v. INTERNATIONAL EXCHANGE BANK (2015)
for damages, BLTB as a common carrier was bound to observe
extraordinary diligence in the vigilance of passenger safety. CA Facts: On June 2, 2000, iBank granted Yulim a credit facility in
affirmed but modified amount of damages. the form of an Omnibus Loan Line for P5M as evidenced by a
Credit Agreement which was secured by a Chattel Mortgage
Whether BTLB and its driver Datinguinoo are solely liable for over Yulim’s inventories in its merchandise warehouse. As
the damages of respondents. further guarantee, the partners namely James, Jonathan and
Almerick executed Continuing Surety Agreement.
Discussion: Petitioner contends that since it was made
solidarily liable with BTLB for actual damages and attorney’s There was a consolidated promissory note to mature on
fees in the decision, then it should no longer be held liable to February 28, 2002 but Yulim defaulted on the said note. On
pay the amount under paragraph 2. April 5, 2002, iBank sent demand letters but without success.
iBank filed for Complaint for Sum of Money with Replevin
Culpa Aquiliana, Employer’s Liability and Defenses against Yulim and its sureties. The items seized from the
The case filed by respondents is an action for culpa aquiliana or warehouse were worth only P140,000.
quasi-delict. In this regard Article 2180 provides that the
obligation imposed by Article 2176 is demandable for the act On October 2, 2002, the petitioners moved to dismiss the
or omission of those persons for whom one is responsible. complaint insisting that their loan had been fully paid after they
• An action based on quasi-delict may be instituted assigned to iBank their condominium unit in Quezon City.
against the employer for an employee’s act or Claiming that its market value has since risen to P5.5 Million.
omission.
• The liability for the negligent conduct of the RTC. The sureties are not liable and only Yulim alone to pay
subordinate is direct and primary but is subject to iBank and dismissed against the individual sureties for there
defense of due diligence and supervision of employee. was no evidence that the loan benefited their families.

In the case: The trial court found that petitioner failed to prove CA. Petitioners failed to prove that they have already paid the
that it exercised the diligence of a good father of a family in the loan. The records are bereft of such evidence showing payment.
selection and supervision of Payunan, Jr. The assignment was a mere temporary arrangement to provide
security for its loan but there was no showing to such which was
The RTC and CA found petitioner solidarily liable with BTLB for considered as a mortgage.
the actual damages suffered by respondents because of the
injuries they sustained. Payunan, Jr. (driver of CDCP) was Concerning the solidary liability of the sureties, is it proper that
discovered to be driving recklessly because of the skid marks as is should be first shown that the proceeds of the loan redounded
shown in the sketch. to the benefit of the family to make them liable?

As well settled in Fabre, Jr. v. Court of Appeals that the owner Discussion: The individual petitioners do not deny that they
of the other vehicle which collided with a common carrier is executed the Continuing Surety Agreement wherein they
solidarily liable to the injured passenger of the same. jointly and severally with the principal hereby guarantee
• Carrier and the driver were jointly and severally liable full and complete payment when due including fees and
because their separate and distinct acts concurred to interest.
produce the same injury.
Contract of Suretyship, Concept
Joint Tort Feasors are Not Liable Pro Rata In a contract of suretyship, one lends his credit by joining in the
They are jointly and severally liable for the tort which they principal debtor’s obligation to render himself directly and
commit. The persons injured may sue all of them and each is primarily responsible with him without reference to the
liable for the whole damages caused. The damages cannot be solvency of the principal. As provided in Article 2047, the
apportioned among them, except among themselves. provisions on Article 1207 shall apply.

Regarding Insurance Claim In the case: They bound themselves to be jointly and severally
The action has already prescribed. The law is clear and leaves with Yulim to unconditionally and irrevocably guarantee full
no room for interpretation. A written notice of claim must be and complete payment of all credit accommodations and
filed within six months from the date of the accident. Since warrant that their liability shall be direct, immediate and not
petitioner never made any claim within six months from the contingent upon the pursuit by the bank.
date of the accident, its claim has already prescribed.
Condominium Assignment, Security not Satisfaction
Held: The Decision of Court of Appeals is Affirmed with What the letter accepted was only the collaterals for the loans
modification and clarification that all of the parties shall be held as well as consolidation of promissory notes. Nowhere is such
jointly and severally liable to pay the actual damages, moral that the Deed of Assignment will extinguish the loan and
damages, exemplary damages, and attorney’s fees. expressed as interim security for the repayment.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 60

The condominium unit then is a mere temporary security, not RTC Reinstatement. This time the RTC held that the spouses
a payment to settle their promissory notes. There was an Sinamban must, solidarily with the spouses Manalastas,
express stipulation that it is a plain and direct acknowledgment proportionately answer for the loan deficiency pertaining to the
that the parties really intended to merely constitute a real estate two PNs they cosigned, since the mortgage security provided
mortgage over the property. by the spouses Manalastas secured all three PNs and thus also
• iBank did not have the same appreciation it was benefited them as comakers.
construed as to be a collateral for the loan and that
there was no REM. But since they did not cosign PN No. OACL 634-95, the
deficiency judgment pertaining thereto will be the sole liability
The assignment being in its essence a mortgage, it was but a of the spouses Manalastas. CA affirmed such decision of the
security not a satisfaction. Nowhere in the Deed of Assignment RTC.
can it be remotely said that a sale of the condominium unit was
contemplated by the parties, the consideration for which would Are the Spouses Sinamban liable for the deficiency even though
consist of the amount of outstanding loan due to iBank from they only signed two PNs as comakers?
the petitioners.
Comaker of PN Binding Solidarily is Primarily Liable
SINAMBAN v. CHINA BANKING CORPORATION (2015) A comaker of a PN who binds himself with the maker “jointly
and severally” renders himself directly and primarily liable with
Facts: February 19, 1990, the spouses Danilo and Magdalena the maker on the debt, without reference to his solvency.
Manalastas executed a Real Estate Mortgage in favor China
Bank over two real estate properties in Pampanga to secure a Promissory Note is a solemn acknowledgement of a debt and
loan of P700K intended as working capital in their rice milling a formal commitment to repay it on the date under the
business. During the next few years they had amendment conditions agreed upon by the borrower and the lender.
increasing their credit to P2,450,000 on March 23, 1994.
A person who signs such an instrument is bound to honor it as
The spouses Manalastas executed several promissory notes in a legitimate obligation duly assumed by him through the
favor of China Bank. In the two PNs petitioner spouses signature he affixes thereto as a token of good faith. If he
Sinamban signed as comakers. In 1995, Chinabank filed a reneges on his promise without cause, the forfeits the sympathy
Complaint for Sum of Money against the parties. The complaint and assistance of this Court and deserves sharp repudiation.
alleged was that they reneged on their loan obligation under
the PNs executed on different dates. In the case: The three subject PNs uniformly describe the
solidary nature and extent of the obligation assumed by each
All the three promissory notes carried an acceleration clause of the defendants “I/We jointly and severally”.
stating that if the borrowers failed to pay any stipulated
interest, installment or loan amortization as they accrued, the In this case, the spouses Sinamban expressly bound themselves
notes shall, without notice be immediately due and to be jointly and severally, or solidarily, liable with the principal
demandable. makers of the PNs, the spouses Manalastas

On the basis on the SOA, Chinabank instituted extrajudicial Article 1216, Chinabank Opted to Proceed Against
foreclosure against the mortgage security. The foreclosure sale Co-Debtors Simultaneously on the Entire Amount
was held on May 18, 1998 with Chinabank as the highest bid Article 1216 provides that the creditor may proceed against any
but still with the auction there was still a loan deficiency of one of the solidary debtors or some or all of them
P1,758,427 and prayed to direct defendants to jointly and simultaneously. The demand made against one of them shall
severally settle the said deficiency. not be an obstacle to those which may subsequently be
directed against the others, so long as the debt has not been
The Spouses Sinamban do not recall having executed fully collected.
promissory notes and had no participation in execution. They
however admitted that they signed some PN forms as comakers In the case: Each PN is simultaneously covered by the same
upon requests from relatives; although they insisted that they mortgage security, the foreclosure of which will also benefit
derived no money or other benefits from the loans. them proportionately. No PN enjoys any priority or preference
• They denied knowing about the mortgage security in payment over the others, with the only difference being that
provided the spouses Manalastas and default and that the spouses Sinamban are solidarily liable for the deficiency on
they did not receive notice of foreclosure. two of them.
• The Spouses Manalastas were declared in default.
Pursuant, then, to the order or manner of application of the
RTC. The defendants Manalastas and Sinamban are jointly and auction proceeds chosen by Chinabank, the solidary liability of
severally liable for the deficiency. MR. They are liable for the the defendants pertaining to each PN on the proportion of the
PNs that they had signed and it would be unfair to make them two signed PNs.
liable for the remaining amount of the deficiency.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 61

LIGHT RAIL TRANSIT AUTHORITY v. MENDOZA (2015) LRTA Obligated Itself to Fund Operating Expenses
Trinidad stressed that as a consequence of the nonrenewal of
Facts: The LRTA is a GOCC under EO 603 was mandated to the O & M agreement by LRTA, METRO was compelled to close
entered into a ten-year operation and management agreement its business operations effective September 30, 2000. This
with the Meralco Transit Organization Inc. (MTOI) from June 8, created, Trinidad added, a legal obligation to pay the qualified
1984 to June 8, 1994 for an annual fee of P5M. Operating employees separation benefits under existing company policy
expenses included all salaries and fringe benefits and top and collective bargaining agreements. The METRO Board of
management compensation. Directors approved the payment of 50% of the employees’
separation pay because that was only what the Employees’
On June 9, 1989 the Manila Electric Company who owned Retirement Fund could accommodate.
499,990 of MTOI shares of stocks sold such to LRTA which made
it a wholly owned subsidiary of LRTA changing its corporate Evidence: LRTA anticipated and prepared for the non-renewal,
name as Metro Transit Organization, Inc. (MTERO). Renewed eventual cessation, involuntary loss of jobs. The clear language
the O&M agreement and extended on a month to month basis. of Resolution No. 00-44, to our mind, established the LRTA’s
obligation for the 50% unpaid balance of the respondents’
On July 25, 2000 the Pinag-isang Lakas ng Manggagawa sa separation pay.
METRO, INC., the rank-and-file union at METRO, staged an
illegal strike over a bargaining deadlock, paralyzing the LRTA is Solidarily Liable as an Indirect Employer
operations of the light rail transport system. In July 28, 2000 the This liability arises from the O & M agreement it had with
LRTA agree to shoulder METRO’s operating expenses for two METRO, which created a principal-job contractor relationship
moths and updated the Employee Retirement Fund. between them. Article 107 and 109 of the Labor Code
provides that an indirect employer is solidarily liable for the
Due to the strike, the LRTA no longer renewed the O&M violations of any provision of the Labor Code.
agreement when it expired on July 31, 2000 resulting to the • The agreement was terminated not on the fault of
cessation of METRO’s operation and the termination of the the METRO for they had no choice on the matter
employment of its workers which are the respondents. considering it was a mere subsidiary.
• On April 2001, the METRO-BOD authorized payment • There was involuntary loss of their employment.
of 50% of the dismissed employee’s separation pay to
be sourced from the retirement fund. Article 1223. Joint Indivisible Obligations
• On May 2001, the received such 50%, but demanded
for the 50% balance but rejected, prompting them to LAM v. KODAK PHILIPPINES (2016)
file a formal complaint to the labor arbiter.
Facts: Lam Spouses and Kodak Philippines entered into an
Labor Arbiter. Labor Arbiter (LA) Arthur L. Amansec pierced the agreement for the sale of three units of the Kodak Minilab
veil of METRO’s corporate fiction, invoked the law against System in the amount of P1,796,000 per unit.
labor-only contracting, and declared LRTA solidarity liable with 1. Total of 19% multiple order discount
METRO for the payment of the remaining 50% of respondents’ 2. Order discount be applied in the form of merchandise
separation pay. On appeal, NLRC affirmed thereby dismissing and delivered in advance immediately after signing.
the appeal. It also held that the case had not prescribed. LRTA 3. No downpayment.
moved for reconsideration, but the NLRC denied the motion in 4. Payable in 48 monthly installments at P35K.
its resolution of March 30, 2009. 5. Prevailing price of P1,796,000
6. Price is subject to change without prior notice.
CA. The CA affirmed the NLRC ruling that LRTA is solidarily
liable for the remaining 50% of respondents’ separation pay, On January 15, 1992, Kodak Philippines, Ltd. delivered one (1)
but not squarely on the same grounds. Unlike the NLRC, it unit of the Minilab Equipment in Tagum. stalled by Noritsu
considered inapplicable the doctrine of piercing the veil of representatives on March 9, 1992.10 The Lam Spouses issued
corporate fiction to justify LRTA’s solidary liability due to the postdated checks amounting to P35,000.00 each for 12 months
absence of fraud or wrongdoing on LRTA’s part in relation to as payment for the first delivered unit.
the nonpayment of the balance.
• It agreed with the NLRC finding that LRTA The Lam Spouses requested that Kodak Philippines, Ltd. not
provided METRO’s “operating expenses” which negotiate the check dated March 31, 1992 allegedly due to
included the employees’ wages and fringe insufficiency of funds. owever, both checks were negotiated by
benefits, and all other general and administrative Kodak Philippines, Ltd. and were honored by the depository
expenses relative to the operation of the light rail bank.
transit system.
The 10 other checks were subsequently dishonored after
Is the LRTA liable for the fifty percent unpaid balance of the the Lam Spouses ordered the depository bank to stop
separation pay of the dismissed workers? payment.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 62

Kodak Philippines, Ltd. canceled the sale and demanded that Joint Indivisible Obligation, Not Only on Subject Matter
the Lam Spouses return the unit it delivered together with its The Letter Agreement contemplated a “package deal” involving
accessories. The Lam Spouses ignored the demand but also three (3) units of the Kodak Minilab System 22XL. The intention
rescinded the contract due to failure to deliver. of the parties is for there to be a single transaction covering
• Kodak filed a complaint for replevin and or recovery all three (3) units of the Minilab Equipment. Respondent’s
of sum of money. obligation was to deliver all products purchased under a
• Lam Spouses failed to appear during pretrial despite “package,” and, in turn, petitioners’ obligation was to pay
extensions and declared in default, Kodak ex parte. for the total purchase price, payable in installments.

RTC. Kodak Philippines, Ltd. was able to obtain a writ of seizure The intention of the parties to bind themselves to an indivisible
on December 16, 1992 for the Minilab Equipment installed at obligation can be further discerned through their direct acts
the Lam Spouses’ outlet in Tagum, Davao Province. The writ was in relation to the package deal.
enforced on December 21, 1992, and Kodak Philippines, Ltd. • There was only one agreement covering all three units
gained possession of the Minilab Equipment unit, accessories, of the Minilab Equipment and heir accessory.
and the generator set. • The Letter Agreement specified only one purpose for
• CA set aside orders and ordered remanded to RTC. the buyer, which was to obtain these units for three
different outlets.
RTC Remand. It found that Kodak Philippines, Ltd. defaulted in • The 19% Multiple Order Discount was applied to all
the performance of its obligation under its Letter Agreement three acquire units.
with the Lam Spouses. It held that Kodak Philippines, Ltd.’s
failure to deliver two (2) out of the three (3) units of the Minilab Tenor of the Letter Agreement Must Prevail, Article 1225
Equipment caused the Lam Spouses to stop paying for the rest Article 1225 of the Civil Code provides that even though the
of the installments. object or service may be physically divisible, an obligation is
• Also ruled when the Lam Spouses accepted delivery of indivisible if so provided by law or intended by the parties.
the first unit, they became liable for the fair value of
the goods received. In the case: There is no indication in the Letter Agreement that
• They were under obligation to pay for the amount of the units petitioners ordered were covered by three (3) separate
one unit, and the failure to deliver the remaining units transactions. The factors considered by the Court of Appeals are
did not give them the right to suspend payment for mere incidents of the execution of the obligation, which is to
the unit already delivered. deliver three units of the Minilab Equipment on the part of
Generator set was purchased it from Davao Ken Trading, not respondent and payment for all three on the part of petitioners.
from Kodak Philippines, Ltd. Thus, the generator set that Kodak
Philippines, Ltd. wrongfully took from the Lam Spouses should The intention to create an indivisible contract is apparent
be replaced. from the benefits that the Letter Agreement afforded to both
parties. Petitioners were given the 19% discount on account of
CA. Court of Appeals ruled that the Letter-Agreement executed a multiple order, with the discount being equally applicable to
by the parties showed that their obligations were susceptible of all units that they sought to acquire. The provision on “no
partial performance stating that: downpayment” was also applicable to all units. Respondent, in
• We found that the intention of the parties is to be turn, was entitled to payment of all three Minilab Equipment
bound separately for each Minilab Equipment to be units, payable by installments.
delivered as shown by the separate purchase price for
each of the item, by the acceptance of Sps. Lam of Propriety and Application of Rescission
separate deliveries for the first Minilab Equipment and The contract between the parties is one of sale, where one party
for those of the remaining two and the separate obligates himself or herself to transfer the ownership and
payment arrangements for each of the equipment. deliver a determinate thing, while the other pays a certain price
• the contract is one that is severable in character as in money or its equivalent.
demonstrated by the separate purchase price for each
of the minilab equipment. Effect of Rescission. Rescission creates the obligation to return
• Rescission led to mutual restitution. the object of the contract. It can be carried out only when the
one who demands rescission can return whatever he may be
Is the Agreement between the Spouses Lam and Kodak obliged to restore.
Philippine severable, divisible and susceptible of partial
performance under Article 1225? To rescind is to declare a contract void at its inception and to
put an end to it as though it never was. It is not merely to
Discussion: Spouses Lam Petitioners assert that the obligations terminate it and release the parties from further obligations to
of the parties were not susceptible of partial performance since each other, but to abrogate it from the beginning and restore
the Letter Agreement was for a package deal consisting of the parties to their relative positions as if no contract has been
three (3) units for the delivery were obliged to pay 48 monthly made.
payments, the total of which constituted one debt.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 63

In the case: Petitioners must relinquish possession of the partially complied their obligation in the promissory note by
delivered Minilab Equipment unit and accessories, while the reduction of the original amount from P120K to P114K, and
respondent must return the amount tendered by petitioners as in order that they will finally settle their obligation, it is of the
partial payment for the unit received. view of the CA that the penalty of 3% rather than 5% would
suffice.
On offsetting. Further, respondent cannot claim that the two (2)
monthly installments should be offset against the amount Penalty Clause, Application
awarded by the Court of Appeals to petitioners because the Although a court may not at liberty ignore the freedom of the
effect of rescission under Article 1191 is to bring the parties parties to agree on such terms and conditions as they see fit
back to their original positions before the contract was entered that contravene neither law or morals, a stipulated penalty,
into. nevertheless, may equitably reduced by the courts if it is
iniquitous or unconscionable or if the principal obligation as
On court intervention. Court intervention only becomes been party or irregularly complied with.
necessary when the party who allegedly failed to comply with
his or her obligation disputes the resolution of the contract. IN THE CASE:The CA exercising its good judgment in the instant
Since both parties in this case have exercised their right to case, has reduced the penalty interest from 5% a month to 3%
resolve under Article 1191, there is no need for a judicial decree a month which petitioner still disputes. Given the
before the resolution produces effects. circumstances, not to mention the repeated breach by
petitioners of their contractual obligation, the Court sees no
Damages in Case of Mutual Breach cogent ground to modify the ruling of the appellate court.
Furthermore, the actual damages amounting to P2,040,000.00
being sought by petitioners must be tempered on account of Held: The petition is denied. The CA’s determination of the 3%
their own failure to pay the rest of the installments for the penalty per month is affirmed by the court. So ordered.
delivered unit. This failure on their part is a breach of their
obligation, for which the liability of respondent, for its failure to
deliver the remaining units, shall be equitably tempered on PRYCE CORPORATION v. PAGCOR (2005)
account of Article 1192 of the New Civil Code.
• Since there was a first infractor, the other party’s Facts: Sometime in the first half of 1992, Pryce Properties
damage is equitably tempered. Corporation (PPC) made representations with PAGCOR on
possibility of setting up a casino in Pryce Plaza Hotel in CDO.
1226-1229. Obligations with a Penal Clause PAGCOR reps went to CDO to determine the pulse of the
people whether the presence of a casino would be welcomed
LIGUTAN v. COURT OF APPEALS (2002) by the residents. Some local government officials showed keen
interest in the casino operation and expressed the view the
Facts: Petitioners Tolomeo Ligutan and Leonidas dela Llana possible problems were surmountable.
obtained on May 11, 1981 a loan in the amount of P120,000
from Security Bank and Trust Company. Petitioners executed a On November 11, 1992, the parties executed a Contract of
promissory note binding themselves jointly and severally to Lease involving the ball of the Hotel for a period of three years
pay the sum borrowed with an interest of 15.189% per year and an addendum which included a lease of an additional 1000
upon maturity and to pay a penalty of 5% every month on the sq.m. of hotel grounds as living quarters and playground of the
outstanding principal and interest in case of default. In addition, casino personnel. PAGCOR advertised at the start of 1992.
they agreed to pay 10% of the total amount by way of
attorney’s fees. Way back in 1990, the SP of CDO passed Resolution No. 2295
declaring it a matter of policy to prohibit and/or not to allow
Despite several demands from the bank, petitioners failed to the establishment of a gambling casino in CDO. Another
settle the debt which amounted to P114K. On September 30, resolution was passed in1992, reiterating with vigor and
1982 the bank sent a final demand letter to petitioners vehemence the policy of the city banning casinos in CDO. And
informing them that they had five days within which to make on December 7, 1992, the SP enacted Ordinance 3353
full payment. Still they defaulted a complaint for recovery of prohibiting the issuance of business permits and canceling
sum of money was filed with RTC Makati. Petitioners failed to existing business permits to any establishment for using, or
present evidence and MR was denied. allowing to be used, its premises or any portion thereof for
the operation of a casino.
Upon appeal with the CA, they questioned their rejection by the
trial court of their motion to present evidence assailing the In the afternoon of December 18, 1992, just a few hours before
imposition of the 2% service charge, the 5% per month monthly the actual formal opening of casino operations, a public rally
penalty charge and 10% attorney’s fees. in front of the hotel was staged by some local officials,
residents, and religious leaders. Barricades were placed which
In its decision the CA affirmed the judgment of the trial court prevented personnel and hotel guests from entering and
except the service charge. Considering that defendants
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 64

exiting the Hotel. PAGCOR was restrained to suspend casino


operations because of the rally. An agreement ended rally. These stipulations are valid and are not contrary to law. Neither
is there anything objectionable about the inclusion of the
On January 4, 1993 another Ordinance was passed by the SP of provisions in the Contract. Being the primary law between the
CDO prohibiting the operation of casinos and providing penalty parties, it governs the adjudication of their rights and
for violation thereof. PPC filed a Prohibition with Preliminary obligations.
Injunction against CDO and Mayor Magtajas declaring its
unconstitutionality for being violative of the non-impairment of A court has no alternative but to enforce the contractual
contracts and equal protection clauses. The SC affirmed the stipulations in the manner they have been agreed upon and
decision of the CA finding the ordinance unconstitutional written. Courts have no power to make or modify contracts.
and void and the city was enjoined from enforcing. Neither can they save parties from disadvantageous
provisions.
In the meantime, PAGCOR resumed casino operation on July
15, 1993 however was indefinitely suspended due to incessant Termination or Rescission
demonstrations. Per verbal advice from the Office of the The term is rescission is found in the Civil Code in the following:
President of the Philippines, PAGCOR decided to stop its 1. Article 1191 on rescission of reciprocal obligations
casino operations in the hotel. 2. Article 1659 which authorizes rescission as an
alternative remedy insofar as the rights and
In two SOAs, PPC apprised PAGCOR of its outstanding account obligations of the lessor and the lessee in contracts of
for the lease as well as two letters including a decision to collect lease are concerned
the full rentals in case of pre-termination of the lease. 3. Article 1380 with regards of rescission of contracts.

PAGCOR sent PPC a letter stating that it was not amenable to Rescission is defined as the unmaking of a contract, or its
the payment of the full rentals citing as reasons unforeseen undoing from the beginning and not merely its termination. On
legal and other circumstances which prevented it from the other hand, termination refers to an end in time or
complying with its obligations. existence, a close, a cessation or conclusion.
PAGCOR argued that it had not other alternative but to pre- In rescission, there is mutual restitution. Meanwhile in
terminate the lease agreement due to the relentless and termination they are not restored to their original situation,
vehement opposition to their casino operations. In turn, neither is the contract treated as it never existed. Prior to its
PAGCOR asked for reimbursement of the improvement of the termination, the parties are obliged to comply with the
hotel’s parking lot from PPC amount to P1.437M. Both parties contractual obligations. Only after the contract has been
filed a complaint for recovery of sum of money. cancelled will they be released from their obligations.

CA Ruling IN THE CASE:Actions and pleadings of Pryce show that it never


CA ruled that PAGCOR’s pretermination of the Contract of intended to rescind the Lease Contract. It was evidence that it
Lease was unjustified. The rallies were not considered as demanded the enforcement and payment of rentals before
fortuitous events that would exempt the gaming corporation termination.
from complying with its contract obligations.
Future rentals cannot be claimed as compensation for the use
Issue: or enjoyment of another’s property after the termination of the
Did the CA commit grave and reversible error by holding that contract. By abrogating the Contract in the present case, PPC
Pryce was not entitled to future rentals or lease payments for released PAGCOR from the latter’s future obligations, which
the unexpired period of the Contract of Lease? included the payment of rentals, to grant such would be unjust
enrichment on the part of PPC.
On Collection of Remaining Rentals
PPC anchors its right to collect future rentals on the provisions Article in the Contract is a Penalty Clause
of the Contracts and that termination is different from In obligations with a penal clause, the general rule is that the
rescission under Article 1659. PAGCOR argued that 1659 penalty serves as a substitute for indemnity for damages and
governs thus PPC is no longer entitled for such future rentals the payment of interests. But there are exceptions when the
because it chose to rescind the contract. obligee can recover both penalty and damages:
1. When there is a stipulation to the contrary
Article 1159: Contract Provision has Effect of Law 2. When the obligor is sued for refusal to pay the agreed
In their Contract of Lease, the parties agreed that: penalty
1. To give PPC the right to terminate and cancel the 3. When the obligor is guilty of fraud
Contract in the event of a default or breach by the
lessee IN THE CASE:The first exception applies because Article XX(c) of
2. To make PAGCOR fully liable for rentals for the the contract provides that aside from the payment of the rentals
remaining term of the lease despite the exercise of corresponding to the remaining term of the lease, the lessee
such right to terminate. shall be liable for all damages, actual or inconsequential
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 65

resulting form the termination of the contract. PAGCOR must took possession of the store space in SM and confiscated the
be held bound to its obligations. equipment and personal belongings of the petitioner found
therein after the expiration of the lease contract.
Reduction of Penalty
The question of whether a penalty is unconscionable or Petitioner demanded the release of the equipment’s and return
reasonable is addressed to the sound discretion of the courts. of security deposits but was not heeded. This prompted the
To be considered in fixing the amount are the type, extent, petitioner to file for Specific Performance, Sum of Money and
purpose of the penalty; the nature of the obligation; the mode Damages against Supervalue, Inc.
of the breach and its consequences; the supervening realities;
standing relationship of the parties; and the like. Respondent countered that petitioner committed several
violations of the terms by not opening, introducing new variety
IN THE CASE: PAGCOR’s breach was occasioned by events, and that also frequently closing earlier than agreed closing
although not fortuitous in law, were in fact real and pressing. hours. Respondent averred that petitioner is liable for P106K
We find that PAGCOR conducted a series of negotiations and representing the penalty for selling a new variety of
consultations before entering into the Contract not only with empanada, electricity and water bills, rental adjustments.
PPC but also with local officials who assured that the problem
was surmountable. PAGCOR even took pains to contest the RTC rendered a judgment in favor of Florentino and found that
ordinances which was indeed declared unconstitutional. And the physical takeover was illegal. CA modified and found that
was advised by the OP to stop their operations. They also Supervalue was justified in forfeiting the security deposits
suspended their operations led to tremendous loss of revenues and was not liable to reimburse the petitioner of the value
and only fully operated under the Contract for a limited time. of the improvements introduced. Supervalue has no
obligation to reimburse Florentino for the amount.
HELD: We consider the claim for future rentals as penalty
amounting to P7,037,835.40 to be highly iniquitous. The CA maintained RTC order for respondent to return properties
amount is reduced to the advanced deposits in the sum of after she has settled here obligations to the respondent. CA
P687,289.50 should be sufficient for the breach. denied petitioner’s MR.

FLORENTINO v. SUPERVALUE, INC. (2007) Issue:


Whether or not the respondent is liable to return the security
Facts: Petitioner is doing business under the business name deposits to the petitioners.
“Empanada Royale” a sole proprietorship engaged in the retail
of empanada. Respondents is a domestic corporation engaged Penalty Clause on the Contract of Lease
in the business of lending stalls and commercial store spaces Since it was already established that petitioner was guilty of
located inside SM Malls all throughout the country. committing several breaches, the CA decreed that she cannot
rightfully demand the return of the security deposits for the
In March 1999, petitioner and respondent executed three same are deemed forfeited because of evident contractual
Contracts of Lease containing similar terms and conditions obligations. The provision is in a nature of a penal clause to
over cart-type stalls at SM North Edsa, SM Southmall and a ensure faithful compliance with the terms and compliance. The
store space at SM Megamall. The term of each contract is for a contractual provision reads:
period of four months and renewable upon agreement. Before
expiration of said contracts, petitioner received two letters from “SECTION 18. Termination. – Any breach, non-perofrmance or non-
Supervalue with the following: observance of the terms and conditions herein provided shall constitute
default which shall be sufficient ground to terminate this lease, its
1. Petitioner was charged with violation Section 8 of the
extension or renewal. In which event, the LESSOR shall demand that
Contract of Lease by not opening on December 16,
LESSEE immediately vacate the premises and LESSOR shall forfeit in
1999 and December 26, 1999. Respondent was also its favor the deposit tendered without prejudice to any such other
charged with selling a new variety of empanada appropriate action as may be legally authorized.”
called the mini-embutido and of increasing the price
of her merchandise from P20 to P22 without the prior Reduction of Penalty
approval of the respondent. And was frequently GENERAL RULE: Courts are not at a liberty to ignore the freedoms
closing earlier than the usual mall hours due to non- of the parties to agree on such terms and conditions as they
delivery or delay in the delivery of stocks. see fit if they are not contrary to law.
2. In second letter, respondent informed the petitioner
that it will no longer renew the Contracts of Lease for EXCEPTION: Nevertheless, the courts may equitably reduce a
the three outlets. stipulated penalty in the contracts in two instances:
1. If the principal obligation has been partly or irregularly
Petitioner explained that the mini-embutido is not a new complied with.
variety of empanada but had similar filing, only its size was 2. Even if there has been no compliance, if the penalty is
reduced in order to make it more affordable. But still the iniquitous or unconscionable.
respondent still refused to renew its contract. Respondents
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 66

IN THE CASE:The forfeiture of the entire amount of security Indemnity Agreement including serval employees of DBC
deposits in the sum of P192,000 was excessive and consenting to their joint and several liabilities to Country
unconscionable considering that the gravity of the breaches Bankers in case the surety bond be executed upon.
committed by the petitioner is not of such degree that the
respondent was unduly prejudiced thereby. It is but equitable On April 23, 1992 the Country Bankers received a Motion for
to reduce the penalty of the petitioner to 50% of the total Execution of the surety bond filed by Borja with RTC Caloocan
amount of the security deposits. The respondent is then for Rogelio’s alleged violation of the Compromise Agreement.
under the obligation to return the 50% of the P192,000. Despite the question on the status of the Omnibus Motion filed
by Rogelio, the Sheriff arrived at the Country Bankers office thus
On Reimbursement of the Improvements restraining it was constrained to pay the amount of the surety
To be entitled to reimbursement for improvements introduced bond in this case. The Motion was denied. Country Bankers
to the property, the petitioner must be considered a builder in demanded from the petitioners the reimbursement.
good faith. A builder in good faith is one who is unaware of
any flaw in his title to the land at the time which he builds on it. Petitioner wrote Country Bankers stating that the voluntary
payment of the surety bond done by the surety prevented them
IN THE CASE:The petitioner cannot claim that she was not aware from contesting the validity of the issuance of the Writ of
of any flaw in her title or was under the belief that she is the Execution (due to the fait accomplis of the case). This prompted
owner thereof. Being mere lessees, they knew that their Country Bankers to file for recovery of sum of money.
occupation of the premises would continue only for the life of
the lease. Plainly, they cannot be considered possessors nor CA reversed RTC ruling on dismissing Country Bankers’
builders in good faith. petitioner. The appellate court expressed that what Country
Bankers paid was an obligation legally due and demandable. It
HELD: The instant petition is partly granted. The CA decision is acted on compulsion of the writ of execution, which appears to
affirmed with the modification that the respondent may forfeit have been regularly, and validly issued, and, by its very nature,
only 50% of the total amount of the security deposits in the sum is immediately enforceable.
of P192,000, and must return the remaining 50% to the
petitioner. No costs. Issue:
Whether petitioners should indemnify Country Bankers of bond.
DIAMOND BUILDERS v. COUNTRY BANKERS (2007) Discussion: The court denies the appeal and affirm the ruling
of the Court of Appeals.
Facts: The controversy originated form a civil case in RTC
Caloocan filed by Marceliano Borja against Rogelio S. Acidre Nature of a Compromise Judgment
for the latter’s breach of his obligation to construct a residential A compromise judgment is a decision rendered by the court
and commercial building. Rogelio is the sole proprietor of the sanctioning the agreement between the parties concerning the
petitioner Diamond Builders Conglomeration. determination of the controversy at hand. It is stamped with
judicial imprimatur, and done by two parties putting an end to
To put an end to the foregoing litigation, the parties entered a lawsuit, adjusting their difficulties by mutual consent in the
into a Compromise Agreement which reads in part: manner which they agree on. Upon court approval, it transcends
its identity as a mere contract as it becomes a judgment. As a
e. Rogelio should pay the amount of P570,000 as follows: rule, compromise judgments are non-appealable.
1. P370,000 from 5th day of approval of Compromise
Agreement signaling the start of 75 days to complete If a party fails or refuse to abide by the compromise agreement,
construction of the building. the other party may either enforce the compromise or regard it
2. xxx as rescinding and insist upon original demand.
3. Must be fully finished pursuant to the agreement
within 75 days counted from the receipt of payment. IN THE CASE:The Compromise Agreement between Borja and
4. Upon receipt of the amount, Rogelio shall submit in Rogelio explicitly provided that in case of the failure to
favor of the plaintiff a performance or surety bond complete construction in 75 days, the full implementation of
to answer or indemnify plaintiff in the event the the surety bound as be made as penalty to the default, as an
building is not finished on the 75th day. award of damages to Borja. Therefore, the payment made by
5. If completed in 75 days, plaintiff shall pay P200,000 Country Bankers to Borja was proper.
and P90,000 as bonus. If failed to complete on the 75th
day, Rogelio shall not be entitled to any further When RTC Manila ruled that the payment was “voluntary” by
payments and the performance or surety bond shall be Country Bankers, it disregarded the non-appealable nature of a
fully implemented by way of penalizing and/or as compromise agreement. And the Petition was done 12 days
award for damages in favor of plaintiff. after the payment was made, thus the Court is perplexed
why the petitioners are banking on a reconsideration that
In compliance, Rogelio obtained a Surety Bond from Country has already been issued and satisfied.
Bankers in favor of the Spouses Borja. They also signed an
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 67

Solidary Liability towards Country Bankers


The Indemnity Agreement signed by Rogelio and other
petitioners explicitly provided for an incontestability clause
which reads in part:

Any payment or disbursement made by Country Bankers xxx


either in the belief that it was obligated to make such payment
or in the belief that payment was necessary to avoid greater
loss shall be final and shall not be disputed by the undersigned,
who thereby jointly and severally bind themselves.

RULE:Petitioners are obligated to reimburse Country Bankers


the amount of P370,000 jointly and severally as agreed.

Suretyship Does Not Bind Surety to Creditor


CONTENTION: Petitioners desperately attempt to impute to
Country Bankers lack of initiative for it to intervene in the
execution proceedings before the RTC.

This contention, as with the rest of the petitioner’s arguments


deserves scant consideration. It is only a surety as a co-debtor
in the penal clause but no a solidary debtor of Rogelio. The
suretyship does not bind the surety to the creditor. The
moment the surety is fulfilled, the surety may ask from
reimbursement from the principal debtor for the amount paid.

HELD: The petition is denied. The decision of the Court of


Appeals is affirmed. Costs against petitioner.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 68

PRESCRIPTION AND OBLIGATIONS ARTICLE 1164. Obligations to Deliver a Thing


Q1. X obtained a loan from the bank, secured by a real estate
Review Notes under Atty. Galas
mortgage over a parcel of land. X did not pay the loan, the bank
foreclosed the mortgage. There was now redemption, title is
ARTICLE 1129. Just Title and Transmission of Rights
consolidated in the name of the bank. Subsequently Y filed a
Q1. Can the debtor dispose, encumber, alienate a property;
case against X, claiming that the Deed of Sale presented by X
a. Prior to the happening of a resolutory condition?
to the Register of Deeds was a forgery and this was proven that
b. Prior to the happening of a suspensive condition?
indeed Y’s signature to such is a forgery. The court declared the
nullity of the deed of sale. Title was reconveyed to Y. The Court
A. Yes, the possessor has just title, but he cannot transmit
said, the bank is mortgagee in good faith, and as such the
any right over it because there is that condition like in
mortgage annotation is carried over to the title on X.
suspensive or resolutory condition. In a resolutory
condition, there is mutual restoration, while in a
The bone of contention is that, the property has a building but
suspensive condition, such condition is required
is producing fruits in the form of rentals. Who has better right
before obligations arises.
over the rentals or the fruits?

Q2. In dation in payment, the debtor in lieu of the obligation


A. The rentals should belong to Y. The property that was
consisting of a sum of money, the debtor offers a thing and the
mortgaged was only the parcel of land, it excluded the
creditor accepts. If the creditor accepts it, does he have a right
accession, so it belongs to Y. Moreover, the deed of
over it?
sale was void making all the products (real estate
mortgage and foreclosure) also void. That is without
A. Yes, he has just title over however this title is defective,
prejudice to the part Y to annul the entire transaction.
so he cannot transmit any right over because this is
But in terms of the fruits, it belongs to Y because the
governed by the law on sales. Thus, for it to have its
property of the mortgage is only the land, what is not
title perfected, there must be a subsequent deed of
included is deemed excluded, and the only subject
sale. He was not yet the owner due to the absence of
matter was only the land, thus the accessions are not
the deed of sale.
included.

• In relation to Article 1130. The evidence of just title can


ARTICLE 1174. Fortuitous Events
be the agreement of dation in payment itself, but it is
Q1. What are the exceptions towards the general rule that “no
not a proof of ownership for it still requires a deed of
one shall be responsible to events that cannot be foreseen, and
sale.
if it can be foreseen, it is inevitable?”

ARTICLE 1138. Tacking of the Period


A. The following are considered exceptions to the non-
Q1. Suppose the possessor was in bad faith, while the
responsibility in cases of fortuitous events:
subsequent possessor is in good faith. It must be a successor-
1. Law
in-interest (if it was a stranger, it is not allowed). So, what if it
2. Stipulation by the parties
there is possession in bad faith for eighteen (18) years, and the
3. Doctrine of created risk
subsequent possessor is in good faith? (Property in question is
4. Object is generic or indeterminate
immovable).
5. Obligor is in delay
6. Arises from the crime
A. Ordinary prescription, in good faith and with just title
7. Degree of diligence required
is ten (10) years (1134). While extraordinary
8. Delivery to two persons not of the same interest
prescription, in bad faith, is thirty (30) years (1137). The
9. Coupled with the negligence of the debtor
subsequent possessor in good faith must complete
four (4) more years before he has acquired the
NOTE: Tire blow-out and defective breaks are not considered as
property through prescription.
fortuitous events.

Rationale: In prescription of ownership and other real


ARTICLE 1180. When Court is to Fix Period
rights over immovables, one year of possession in
• When my means permit me to do so
good faith, is equivalent to three years of possession
• When I can afford it
in bad faith. That is why in this question, the preceding
• I will pay you little by little
eighteen (18) years of possession in bad faith by the
• When he is able
first possessor is equivalent to six (6) years in good
• As soon as I will have the financial capacity
faith, that is why the subsequent possessor, in good
There is no specific term or period when the debtor should
faith, has only to tack 4 years of possession in good
perform, thus any demand by the creditor towards the debtor
faith to acquire the property by prescription.
shall be premature. The recourse is to go court and let the court
fix the period pursuant to Article 1197.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 69

Unless the fixing of the period is now unnecessary for it would but was made impossible by supervening event, it will not affect
serve no purpose but to further delay the performance of the the validity of the obligation.
obligation, because it has been outstanding, then there is no
more need to fix the period (Central Philippines University v. ARTICLE 1188. Preservation of the Creditor’s Rights
Court of Appeals, 1995). Q1. May the debtor prior to the happening of the suspensive
condition commit an act that would prejudice the creditor, with
ARTICLE 1182. Potestative Conditions the debtor whom has only a right which is inchoate or mere
Not only the condition is void, but the entire conditional expectancy because he still must wait for the happening of the
obligation because it is based on the sole will of the debtor suspensive condition.
which is based on a pure potestative condition. The obligation
becomes due and demandable, which makes the debtor A. It depends on the object of the obligation. There is no
immediately liable. problem if the object is generic or indeterminate
because it can be performed by delivery of another in
Examples of Pure Potestative Conditions the same class or specie. But not if determinate or
Trillana v. Quezon College (1953). The stipulation in this case specific.
what that the debtor would pay the full value of a subscription
for shares in the Quezon College “after she had harvested the ARTICLE 1191. Rescission/Resolution of Obligations
fish” which shows that it is dependent upon her sole will which
makes the conditional obligation void. Notable Distinctions between 1191 and 1381
1191 1381
Osmeña v. Rama (14 Phil. 99). The defendant executed a Only applicable to May also apply to unilateral
promissory note stating that “I promise that if the house where reciprocal obligations obligations
I live is sold, I will pay my indebtedness” is an example of a Based on breach of faith Based on pecuniary injury
potestative condition dependent upon the exclusive will of the Principal action Subsidiary action
debtor, and is therefore, void. Only available to the injured Available even to third
party persons
Example of Mixed Potestative Condition (Valid)
Hermosa v. Longara (1953). The condition of the obligation NOTE: Article 1191 is resolution and restored to their status as
involved in this case was that payment was to be made as soon if there was no obligation, this is cancellation not termination,
as debtor receives funds derived from the sale of his property back to status quo ante.
in Spain. The will to sell is present. The condition does not
depend exclusively on his own sole will because there are other Exceptions on the Applicability of Article 1191
factors to be considered like the presence of a buyer and price 1. If there is an express stipulation.
which is beyond his power or control. 2. Contracts of lease
• This condition implies that the obligor had already 3. Recto Law, sale on installment of movables
decided to sell his house and that all that is left to do 4. Maceda Law, sale of realty through installment
is to consummate the sale and the price thereof to be a. Before one can rescind, there must be a
remitted to him. notarial notice of rescission. Without such,
• If the condition were, “if he decides to sell his house” or there can be no rescission on the part of the
“if he likes to pay the sums advanced” or “If I will sell injured party absent such requirement.
my house” implying that the debtor alone would
payment depend, the condition would be purely Principles under Assigned Cases on Rescission
potestative dependent upon his will or discretion Cannu v. Galang (2015)
which is void if such happens. Rescission under Article 1191 can be availed only when there is
a substantial breach, however, when there is only a slight
NOTE: Potestative resolutory condition on the part of the breach, it would not warrant rescission but only fixing of the
debtor is valid because the immediate performance of the period.
obligation. Pure potestative on the part of the creditor is valid.
Swire Realty Development v. Yu (2015)
ARTICLE 1183. Impossible Conditions This is a Contract to Sell, and as a general rule, Article 1191 does
• It will only annul the obligation if fulfillment of the not apply to contracts to sell because there is no existing
obligation depends upon impossible condition. contract yet due to the non-happening of the suspensive
• If it is severable, then the obligation shall subsist, the condition.
condition deemed to not have been agreed.
But in this case, the court allowed such because there is already
NOTE: The impossibility must exist at the time of the full payment of the purchase price, yet the debtor still did not
constitution of the obligation even if because of a supervening deliver. There was now application because upon full payment,
it becomes impossible. The impossibility must be present at the the obligation to transfer ownership had arisen.
time of the creation. If it was possible at the time of creation
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 70

Fong v. Duenas (2015) Kinds of Terms or Periods


In relation to 1192. Both parties are in mutual breach of their Ex Die (Suspensive) In Diem (Resolutory)
obligations under the verbal joint venture agreement (Duenas, Arrival of period or Arrival of period or lapse
non-incorporation of alliance, usage of funds; Fong, P32.5M to lapse shall make the shall terminate the
P5M contribution). But due to the nature of the verbal contract, performance of the performance of
the Court is unsure as to whom was the first infractor, and such obligation demandable obligation
the second sentence of 1192 applies, wherein they cannot “From a day certain” “To a day certain”
recover damages from each other because each shall bear his “Until a day certain”
own damages.
ARTICLE 1196. Benefit of the Period
Ascano-Cupino v. Pacific Rehouse (2015) GENERAL RULE: Whenever a period is designated, it is presumed
They failed to present the necessary documents, thus they are to have been for the benefit of both the creditor and the
not the injured party and cannot ask for the rescission. Pacific debtor in such obligations.
Rehouse is the injured party and entitled to choose between EXCEPTION: Unless from the tenor of the same it appears that it
rescission or fulfillment with damages in either cases. Pacific favors one of the other.
elected specific performance for the fulfillment of the
obligation. Benefit Examples Debtor’s Creditor’s
Actions Actions
Nolasco v. Cuerpo (2015) Benefit “within the 10th Debtor He may
Rescission was not proper because there was an express for the year” cannot demand the
stipulation for a contractual recourse in case of failure of Creditor pretermination compel him performance
Nolasco to cause the transfer of the subject land to his name, fee to accept at any time
stating that it would be done by Cuerpo at the expense of payment before the
Nolasco, thus rescission was not available as remedy. before the period
period expires.
ASB Realty v. Ortigas (2015) expires.
Even though ASB Realty performed acts in contravention with
the tenor of the Deed of Sale between its assignor Amethyst Debtor
and Ortigas by building commercial spaces when it expressly cannot
stipulated against such, Ortigas cannot hold ASB a party in a refuse the
rescission on such document because there is absence of privity performance
between ASB Realty and Ortigas. of the
demand or
Even though there was this annotation on the title of the else he will
obligations which was carried over by ASB Realty from be in mora
Amethyst upon the Deed of Assignment, the Deed of solvendi.
Assignment did not state that ASB shall step into the shoes of Benefit “on or before Can deliver Cannot
Amethyst as a party in the Deed of Sale. Thus, the annotation for the May 9” or perform compel nor
in the covenants in the deed of sale did not give rise to the Debtor “within five obligation demand the
liability on the party of ASB without its expression assumption to years” within the debtor to
such duties or obligations. period deliver
provided but before the
ARTICLE 1193. Suspensive and Resolutory Periods cannot be arrival of the
compelled to date.
Notable Distinctions between Condition or Term pay before
Condition Term the said Cannot
Future and uncertain Future and certain date. refuse to
Gives rise or extinguishes Does not affect existence of accept the
obligations obligation but only the He may performance
demandability oppose a during such
May be from past event Always refers to the future premature period
unknown to parties demand, but provided or
A condition on the sole A period on the sole will of may validly else he will
will of debtor makes the the debtor empowers the pay anytime be in mora
obligation void. court to fix period. before the accepiendi.
expiration of
the period.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 71

ARTICLE 1198. Grounds when Debtor Shall Lose Benefit of Suppose this is the debtor’s choice. If the debtor chosen the
The Period parcel of land, he informs the creditor of such. But prior to
In relation to 1198 (3) on Fortuitous Event. A car was partially delivery such was expropriated by the state which is considered
destroyed by lightning it does not mean that the obligor now a fortuitous event for he cannot prevent the State. The creditor
loses the benefit of the period, because the law requires, in can still choose between the remaining.
order to lose the benefit of the period by fortuitous event, it
must be totally damaged or has totally disappeared. One that Suppose the car was destroyed through the debtor’s fault, and
is not without that the fault of the obligor. this was the last and was lost through a fortuitous event. The
• If there is fault on the obligor, even if the impairment liability of the debtor shall be damages based on the last thing
is partial unless he gives new ones immediately and lost. If all together was lost, the value of the last thing that
satisfactorily. disappeared. If creditor’s choice, he can choose any of the value
• If the car, even if was totally destroyed, but was of those lost through fault of the debtor, so he cannot choose
insured against fire or lightning, then the debtor shall the parcel of land, its either value of car or Omega Watch.
not lose the benefit of the period because he can claim
benefits from the insurance policy. ARTICLE 1206. Facultative Obligations

NOTE: 1198(5) mere attempts to abscond is sufficient enough Alternative Facultative


for the debtor to lose the benefit of the period thus making the As to contents of the obligation
obligation immediately due and demandable. There are various prestations all Only the principal prestation
of which constitute parts of constitutes the obligation, the
obligation. accessory being only a means
ARTICLE 1200-1205. Rules on Loss of Object of Prestations
to facilitate payment.
Dependent on Person to Choose Creditor must demand all the
prestations in the alternative. Creditor can only demand the
Choice by Debtor Choice by Creditor principal prestation.
General rule and default Must be expressly granted to
right of choice is given to the creditor to have right of As to nullity
the debtor (1200). choice (1200). The nullity of one does not The nullity of the principal
invalidate the obligation, which prestation invalidates the
The debtor shall lose the If through fortuitous event
is still in force. obligation and the creditor
right of choice when 1. If two remains,
cannot demand the substitute
among the prestation, only creditor chooses. even when valid.
one is left practicable 2. If one remains, such As to choice
(1202). is delivered. The right to choose may be Only the debtor can choose the
given to the creditor. substitute prestation.
If through fault of debtor As to effect of loss
1. Loss of one, creditor Only the impossibility of all the The impossibility of the
can choose those prestations without fault of the principal obligation is sufficient
left or the price debtor extinguishes the to extinguish the obligation,
obligation. even if the substitute is
which was lost by
possible.
fault of the debtor
with a right to
VALID FACULTATIVE INVALID “FACULTATIVE”
damages (1205).
I will deliver the P500,000 I will deliver P500,000 on
If all are lost by debtor 2. If all are lost by the
on December 05, 2017 December 05, 2017 but if I
through his fault, creditor debtor through his
and if I am unable, I will cannot deliver it, you will
shall be entitled to fault, creditor can
execute a Deed of Sale become the owner of my car.
damages. choose from the
over my car.
• The basis of price of any of them,
indemnity is the also with indemnity
Valid facultative Void obligation.
value of the last for damages (1205).
obligation. Constitutes pactum
thing disappeared
The principal obligations commissorium, the immediate
or service became
are the money, but the transfer of ownership without
impossible (1204).
debtor can render the any execution of deed of sale.
execution of a deed of If there is automatic transfer,
sale over the car in this is void. Which is different
For the discussion of alternative obligations, please refer to the
substitution. from dation in payment, the
prestations below:
offers a thing in lieu of the
a. 150 sq.m. parcel of land (expropriated)
monetary obligation, and
b. Car (destroyed with debtor’s fault)
subsequently executes a deed
c. Omega Watch (theft)
of sale.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 72

JOINT AND SOLIDARY OBLIGATIONS demand was made, and


that performance was
ARTICLE 1207 and 1208. Notable Distinctions on Joint and not fulfilled.
Solidary Obligations “Mancommunada” “In solidum”
“Pro rata” “Solidarily liable”
Joint Obligation Solidary Obligation “We promise to pay” and “I promise to pay” and
When there are as many Each debtor is liable to there are two or more there are two or more
debtors as there are comply with the entire signatories. signatories.
debts and as many obligor obligation, and “Individually and
creditors as there are each creditor is entitled collectively”
credits to receive the entire “Jointly and severally”
credit.
The performance of one They are bound by NOTE: When payment is done by one of the solidary debtors,
does not affect the mutual representation he only has a right of reimbursement, he does not become a
liability others because or agency which is solidary creditor, he cannot demand from any of his co-debtors
each are liable for their characterized by trust the entire obligations less his share because he can only
own shares in debts. and confidence. demand from them their respective share in the obligation.
• He does not become a solidary creditor against his co-
When demand is made debtors
to a solidary debtor, he • Only right of reimbursement from each of them only
must render to their own respective shares in the debt.
compliance with the
entire obligation. Exceptions to the Presumption of Joint Obligations
1. Express stipulation by the parties
If a debtor pays only a 2. By the nature of the obligations
portion of the debt and 3. By law
is received by a a. Provisions in the human relations (Ardiente
solidary creditor, v. Pastorfide)
because of the mutual b. Participants in the crime
representation, c. Suretyship
regardless of the d. Failure to fully satisfy by the absolute
amount that was community of conjugal partnership, the
delivered which was husband and the wife’s exclusive property
only partial (even if are solidarily liable for those obligations
insufficient to cover that redounded to the benefit the family.
even his own share), 4. By judgment of the court which specifies solidary
the solidary creditor liability even if the original obligations specified a
who accepted such joint obligation.
payment must share
such with the other ARTICLE 1209. Joint Indivisible Obligations
creditors. How shall it be performed? All debtors must perform, non-
If one of the joint If one of the solidary performance by one means non-performance by the others.
debtors is insolvent, it debtors is insolvent, it
will not increase the will increase It is now converted for the payment of damages, whereby each
liability of other joint proportionately the of the joint indivisible debtor will be liable only for his share in
debtors. burden of the other the value plus damages, not the entire obligation because they
solidary debtors. are bound jointly and not solidarily.
Demand made a creditor Demand upon one
made to a joint debtor shall stop the running ARTICLE 1211. Solidarity may exist although the creditors and
will only stop the running of the prescriptive, debtors may not be bound in the same manner and by the
of the prescriptive period even if only one of the same periods and conditions.
with respect to the solidary creditors
debtor to whom demand would make a demand Stipulation: A, B, C solidarily bound themselves to deliver
was made. It will not upon any of the P600,000 to D, E, F.
interrupt as to other solidary debtors. • A’s share shall be performed upon the return of D’s
debtors. wife from United States.
• B’s share shall be delivered if X will not separate from
Delay is incurred only by his wife W.
the debtor to whom the
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 73

• C’s share shall be due and demandable within


December 25, 2017. Modified situation: Suppose the creditors are the ones who
agreed to be jointly bound among themselves, if D makes a
Analysis: The following are the effects of such stipulation. demand upon A, the latter must deliver the entire obligation.
• A’s share is dependent on a suspensive condition, • Suppose A was able to deliver only his share only in
because it is uncertain whether D’s wife will go return the obligation which is equal to the share of each
or not. creditor, can D now be compelled to share the
• B’s share is dependent on a resolutory condition received payment to E & F?
because it shall not be delivered when the condition o No, because they are jointly bound among
of separation happens. themselves.
• C’s share is dependent on a suspensive period which • The creditors among themselves agreed to be jointly
is for the benefit of the creditor. bound, he is not under the obligation to share it with
other creditors.
If D makes a demand upon A, can A be made liable?
• Yes, because they are solidarily bound. He shall deliver ADVANTAGE: It will stop the running of the prescriptive period
to D P600,000 less his share, because his share is to all other creditors. The mutual representation will not exist
subject to a suspensive condition on the return of D’s anymore between themselves but towards the debtors.
wife.
ARTICLE 1213. A solidary creditor cannot assign his rights
Is B’s share immediately due and demandable? without the consent of the others.
• Yes, because it is of a resolutory condition as provided • They can remit and novate, except assignment unless
under Article 1179. there be consent.
• If one of the solidary creditors would die, the heir
would not step into the shoes, the trust and
Is C’s share demandable? confidence is only between the solidary creditors and
• Yes, because the period is for the benefit of the does not extend to the heir.
debtor. • The can demand for the payment but not succeeding
o Suppose the period is changed into “within into the shoes of the deceased solidary creditor.
five years”, it becomes for the benefit of the • If there is assignment, even with an SPA authorizing
debtor, thus D now cannot compel C to an agent to collect, it will not bind the other creditors
deliver before the arrival of the period, but C if there is no consent. If debtor pays through this third
can choose to deliver it and D cannot refuse person, there is no extinguishment of obligation, and
to accept. it still subsists. It is a wrongful payment.
ARTICLE 1214. Demand to any of the Solidary Debtors
If D makes a demand to A, A should pay to D, and A cannot
Modified situation: The solidary debtors are now jointly liable choose to pay either E or F because the mutual agency that
among themselves, but still solidarily liable towards the solidary existed is terminated when that demand is made. The authority
creditors. and the power to demand obligations is now concentrated.
However, this is only between them.
Suppose A will deliver only his share, and was accepted by the • If B pays to D, there is extinguishment.
solidary creditor, can he demand reimbursement from B and • Any of the debtors (whom demand was not made) can
C? Suppose he only delivered only P100,000. pay to any of the debtors (including the one who
• He cannot demand reimbursement because they are made demand), if accepted then would extinguish the
joint among themselves, and if B is insolvent, that will obligation.
not increase the liability of A and C because they are • Who is only prohibited to pay another solidarity
jointly bound to each other. creditor, is the debtor whom the demand was made,
in which he must pay to the one who made the
[NOTE: Usually when solidary debtors do not stipulate demand.
that they are joint between themselves, even if the
solidary debtor delivers a share even if not sufficient ARTICLE 1221. In Case of Loss and Fortuitous Event
to cover his share, he can still demand proportionate Situation. A, B and C were to deliver to D, E and F a car with
reimbursement from the other co-debtors less his Chassis No. 123456. D made a demand to C, but C did not
share, but in this modified situation, they expressly comply with the obligation despite demand, and thus he has
agreed to be bound in a different manner amongst incurred in delay, D made a demand to B now, but before B can
themselves.] fulfill the delivery, the car was damaged leading to an
impairment or deterioration and creditor refuses to accept.
They are not bound in the same manner, they are bound • This has now been converted to a payment of:
together towards the creditors as solidary debtors but among o Price and value of the car
themselves they are jointly bound. o Damages
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 74

o Interest Yulim v. International Exchange Bank (2015)


They bound themselves to be jointly and severally liable with
Action: Because A and B were ready to comply of the Yulim by executing a Continuing Surety Agreement making
obligation, but the reason of the delay was due to C and their liability be direct, immediate and not contingent upon the
because of his delay the car had been impaired, when B would pursuit of the bank. The deed of assignment executed upon the
make a demand upon A in his share in the obligation, A and B condominium not satisfaction of the obligation for it was a
are only liable for his share in the price for he is not responsible mere interim security of the payment.
for the damages and the interest for he is ready for the
fulfillment of the obligation. Sinamban v. China Banking Corporation (2015)
• C is liable for the share in the price, and solely liable As comakers of the promissory notes being “jointly and
for damages and interest. severally” liable they make themselves directly and primarily
liable with the maker of the debt without reference to his
In summary: If there is impairment is by reason of fault of one solvency. The bank opted to institute the action against all the
of the solidary debtors and is in delay, the others shall be promissory notes, which these PNs does not enjoy any priority
liable for their share but not for the payment of damages and or preference in payment over the others for none of them is
interests, it is solely shouldered by the one who caused the more onerous.
fault or incurred in delay.
Light Rail Transit Authority v. Mendoza (2015)
Situation. Suppose, this was carried over by flood leading to a For METRO to pay the full separation benefits, LRTA should
loss. There was a delay on the part of C and D made a demand provide the necessary funding to completely satisfy these
upon A. benefits. LRTA, by obligating itself to fund the operating
expenses has a legal obligation. The cause of the non-renewal
Action: When it comes to reimbursement, they have no liability of the agreement was not on the fault of METRO. Articles 106,
whatsoever, it is only C who is responsible who is at fault and 107 and 107 of the Labor Code also applies as indirect
incurred in delay, who shall shoulder price, damages and employer.
interest.
Lam v. Kodak Philippines (2016)
In summary: If the object of the prestation was lost by fault of The intention of the parties is for there to be a single transaction
one of the solidary debtors then the other solidary debtors can covering the three units and was to deliver all under a package
perform the obligation upon demand. deal which was also signified in the benefits of no
downpayment, multiple order discount and encapsulated only
The paying solidary debtor can demand reimburse for the in one agreement. Thus, there was breach on the part of Kodak
entire value, price, interest and damages from the solidary for not delivering the “indivisible” obligation as it is, while the
debtor who was responsible for the loss and incurred in delay. Lam spouses also committed breach by not paying the required
monthly payments through checks thus Article 1192 applies on
the tempering of the damages on the part of the Lam Spouses
for Kodak being the first infractor in this case.
Pacific Banking v. Intermediate Appellate Court (1991) ARTICLE 1112. Waiver of Prescription
Guarantor’s undertaking was a contract of surety, stipulation
over the title. Caltex (Philippines), Inc. v. Singzon-Aguirre (2016)

Industrial Management v. NLRC (2000) Introduction: Caltex waived here the defense of prescription, the
The original NLRC decision was joint, thus the writ of execution Court said that it has already prescribed on 13 years. But they
stating that the liability of the respondents as solidary is void. waived the defense of prescription, the Court for another
reason, dismissed the case.
Mariveles Shipyard v. Court of Appeals (2003)
The petitioner Mariveles is solidarily as an indirect employer Facts: MV Dona Paz was an inter-island passenger vessel
under Articles 106, 107 and 109 of the Labor Code. This is owned and operated by Sulpicio Lines, Inc. (Sulpicio) traversing
without prejudice for Mariveles to ask for reimbursement from its Leyte to Manila route on the night of December 20, 1987,
the co-debtor Longest Force. when it collided with MT Vector, a commercial tanker owner
and operated by Vector Shipping Corporation, Inc. (Vector). On
Construction Development v. Estrella (2006) that the particular voyage, MT Vector was charted by Caltex to
The defense that there was a breach of contract of common transport petroleum products. The collision brought forth an
carriage between BLTB and the respondents will not exempt inferno at sea with an estimate of about 4,000 casualties
CDCP from liability because they are joint tort feasors meaning and was described as the world’s worst peace time maritime
that the carrier and the driver were jointly and severally liable disaster.
because their distinct and separate acts concurred to the
production of the same injury. In December 1988, the heirs of victims of the tragedy, instituted
a class action with the Civil District Court for the Parish of
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 75

Orleans, State of Louisiana, United States of America. On Petitioners, who were the defendants in the antecedent cases
November 30, 2000, the Louisiana Court entered a conditional before the RTCs of Catbalogan and Manila, are most adamant
judgment dismissing the said case on the ground of forum non- in invoking their waiver of the defense of prescription while the
conveniens.5 This led the respondents, composed of 1,689 respondents, to whom the cause of action belong, have
claimants, to file on March 6, 2001 a civil action for damages for acceded to the dismissal of their complaint. Article 1112
breach of contract of carriage and quasi-delict with the provides that persons with capacity to alienate property may
Regional Trial Court (RTC) of Catbalogan, Samar, Branch 28 renounce prescription already obtained, but not the right to
(RTC of Catbalogan), against the herein petitioners, Sulpicio, prescribe in the future. Prescription is deemed to have been
Vector Shipping, and Steamship Mutual Underwriting tacitly renounced when the renunciation results from acts which
Association, Bermuda Limited (Steamship). imply the abandonment of the right acquired.

On March 28, 2001, RTC of Catbalogan motu proprio dismissed In the case: In the instant case, not only once did the
the complaint as the respondents’ cause of action had already petitioners expressly renounce their defense of prescription.
prescribed. In an unusual turn of events however, the Nonetheless, the Court cannot consider such waiver as basis in
petitioners as defendants therein, who were not served with order to reverse the rulings of the courts below as the dismissal
summons, filed a motion for reconsideration, alleging that of the complaint had become final and binding on both the
they are waiving their defense of prescription. The RTC of petitioners and the respondents.
Catbalogan, however, merely noted the petitioners’ motion.
• The CA concurred with the RTC of Manila that the The Effect of the Finality of Judgment: A Bar to the
finality of the Order dated March 28, 2001 issued by Prosecution of the Case
the RTC of Catbalogan has the effect of res judicata, Previous to the petitioners’ filing of their motion for
which barred the respondents’ motion to intervene reconsideration, the RTC of Catbalogan issued an Entry of Final
and complaint-in-intervention with the RTC of Manila Judgment stating that its Order dated March 28, 2001 became
final and executory on April 13, 2001. The petitioners claimed
Issue: Whether or not res judicata applies and should the waiver that for this reason, they could not have submitted themselves
of prescription by disregarded due to such. to the jurisdiction of the RTC of Catbalogan by filing such a
belated motion.
Discussion: Petition lacks merit. The petitioners cannot be
permitted to assert their right to waive the defense of But the petitioners cannot capitalize on the supposed finality of
prescription when they had foregone the same through their the Order dated March 28, 2001 to repudiate their submission
own omission. to the jurisdiction of the RTC of Catbalogan. It must be
emphasized that before the filing of their motion for
On Extinctive Prescription reconsideration, the petitioners were not under the RTC of
This case involves the latter type of prescription, the purpose of Catbalogan’s jurisdiction. Thus, although the order was already
which is to protect the diligent and vigilant, not the person who final and executory with regard to the respondents; it was not
sleeps on his rights, forgetting them and taking no trouble of yet, on the part of the petitioners.
exercising them one way or another to show that he truly has
such rights. The rationale behind the prescription of actions is Consequently, it was only after the petitioners’ failure to appeal
to suppress fraudulent and stale claims from springing up at or seek any other legal remedy to challenge the subsequent
great distances of time when all the proper vouchers and Order dated September 4, 2001, that the dismissal became final
evidence are lost, or the facts have become obscure from the on their part. It was from the date of the petitioners’ receipt of
lapse of time or defective memory or death or removal of this particular order that the reglementary period under the
witnesses. Rules of Court to assail it commenced to run for the petitioners.

In the case: There is no dispute that the respondents’ cause of But neither the petitioners nor the respondents resorted to any
action against the petitioners has prescribed under the Civil action to overturn the orders of the RTC of Catbalogan, which
Code. In fact, the same is evident on the complaint itself. The ultimately led to their finality. While the RTC of Catbalogan
respondents brought their claim before a Philippine court only merely noted the motion for reconsideration in its Order dated
on March 6, 2001, more than 13 years after the collision September 4, 2001, the effect is the same as a denial thereof,
occurred.43 Article 1139 of the Civil Code states that actions for the intended purpose of the motion, which is to have the
prescribe by the mere lapse of time fixed by law. complaint reinstated, was not realized. This should have
Accordingly, the RTC of Catbalogan cannot be faulted for the prompted the petitioners to explore and pursue other legal
motu proprio dismissal of the complaint filed before it. It is measures to have the dismissal reversed. Instead, nothing more
settled that prescription may be considered by the courts motu was heard from the parties until a motion for intervention was
proprio if the facts supporting the ground are apparent from filed by the respondents before the RTC of Manila, in
the pleadings or the evidence on record. conformity with the order of the Louisiana Court.

On Waiver of Rights under Article 1112: Not The Main The RTC of Manila denied the respondents’ motion for
Reason of Dismissal intervention on the ground of the finality of the order of the
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 76

RTC of Catbalogan, there being no appeal or any other legal the concept of an owner, since 1944. Feliciano’s claim of sole
remedy perfected in due time by either the petitioners or the possession in his application for free patent did not therefore
respondents. Since the dismissal of the complaint was already extinguish the fact of co-ownership as claimed by the children
final and executory, the RTC of Manila can no longer entertain of Hermogenes.
a similar action from the same parties. The bone of contention
is not regarding the petitioners’ execution of waivers of the Issue: Whether or not the CA erred in (1) recognizing co-
defense of prescription, but the effect of finality of an order ownership between the heirs and whether the order and (2)
or judgment on both parties. ordering the partition of the property for it was a collateral
Heirs of Feliciano Yambao v. Heirs of Hermogenes attack to the validity of the title.
Yambao (2016)
Introduction: This involves co-owners of a property which are related. As a rule, Discussion: Petition is denied. As pointed out by the CA, the
there can be no prescription between co-owner. But a co-owner may repudiate RTC overlooked the fact that the subject property is co-owned
the co-ownership with requisition provided that the requisites should be
by the parties herein, having inherited the same from
complied. But beside the express repudiation of the co-ownership, but the Courts
said, there is no application of that repudiation because one of the positive acts Hermogenes. Feliciano’s free patent application indicated that
of co-ownership, is the issuance of a new title of ownership. The Court still said he merely tacked his possession of the subject property from
that there is still no repudiation. Hermogenes, his father, who held the property in peaceful,
open, continuous, and adverse manner in the concept of an
Facts: The subject of this case is a parcel of land located in owner since 1944.
Zambales, originally possessed by Macaria de Ocampo.
Macaria’s nephew, Hermogenes Yambao (Hermogenes), has This is an implicit recognition of the fact that Feliciano
eight children. After Hermogenes died, it was claimed that all merely co-owns the subject property with the other heirs of
of his heirs were free to pick and harvest from the fruit bearing Hermogenes. Indeed, the heirs of Feliciano have not presented
plants. Eleanor Yambao, the daughter of Hermogenes’ son any evidence that would show that Hermogenes bequeathed
Ulpiano, even constructed a house in the subject property. the subject property solely to Feliciano.
However in 2005, the communal and mutual use of the property
ceased when the heirs of Feliciano, herein petitioners, Co-Ownership and Prescription
prohibited them entering the property and ejected them. A co-ownership is a form of trust, with each owner being a
trustee for each other. Mere actual possession by one will not
This prompted the heirs of Hermogenes to file to RTC a give rise to the inference that the possession was adverse
complaint for partition, declaration of nullity of title/documents because a co-owner is, after all, entitled to possession of the
and damages against the heirs of Feliciano. property. Thus, as a rule, prescription does not run in favor
of a coheir or co-owner as long as he expressly or impliedly
• The heirs of Hermogenes alleged that they and the recognizes the co-ownership; and he cannot acquire by
heirs of Feliciano are co-owners of the subject prescription the share of the other co-owners, absent a clear
property, having inherited the right thereto from repudiation of the co-ownership. An action to demand
Hermogenes. partition among co-owners is imprescriptible, and each co-
• The heirs of Feliciano denied the allegations of the owner may demand at any time the partition of the
heirs of Hermogenes and claimed that their father, common property.
Feliciano, was in possession of the subject property in
the concept of owner since time immemorial. Adverse Possession of a Co-Owner to Run Prescription;
Accordingly, Feliciano was awarded a free patent Requisites
thereon for which Original Certificate of Title (OCT) Prescription may nevertheless run against a co-owner if there is
No. P-10737 was issued. adverse, open, continuous and exclusive possession of the co-
owned property by the other co-owner/s. In order that a co-
RTC dismissed the complaint filed by the heirs of Hermogenes. owner’s possession may be deemed adverse to the cestui que
For they failed to show that the subject property is owned by trust or other co-owners, the following requisites must concur:
Macaria and that the tax declarations and receipts are not 1. That he has performed unequivocal acts of
conclusive evidence of ownership and failed to show that repudiation amounting to an ouster of the cestui que
Hermogenes succeeded from Macaria. trust or other co-owners.
2. That such positive acts of repudiation have been made
On appeal to the CA, he CA, considering that the parties are co- known to the cestui que trust or other co-owners.
owners of the subject property, ruled that the RTC should have 3. That the evidence thereon must be clear and
conducted the appropriate proceedings for partition. convincing.

CA findings: [A] review of the records of the case shows that in On the Prescription of an Action for Partition: The issuance
Feliciano’s application for free patent, he acknowledged that of the certificate of title would constitute an open and clear
the source of his claim of possession over the subject property repudiation of any trust. In such a case, an action to demand
was Hermogenes’s possession of the real property in peaceful, partition among co-owners prescribes in 10 years, the point of
open, continuous, and adverse manner and more importantly, in reference being the date of the issuance of certificate of title
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 77

over the property. But this rule applies only when the plaintiff is 1227. Debtor cannot offer to pay penalty instead of damages,
not in possession of the property, since if a person claiming to unless the right is expressly reserved.
be the owner thereof is in actual possession of the property, the
right to demand partition does not prescribe. Creditor cannot ask for payment of both fulfillment of the
obligation and payment of penalty, unless this has been clearly
In the case: Although OCT No. P-10737 was registered in the granted him. The grant may be implied or tacit which can be
name of Feliciano on November 29, 1989, the prescriptive claimed from contemporaneous or circumstances of parties.
period within which to demand partition of the subject
property, contrary to the claim of the heirs of Feliciano, did not 1228. No need to prove the actual damages, only that he runs
begin to run. At that time, the heirs of Hermogenes were still in the risk to be paid less amount he actually suffered, because
possession of the property. It was only in 2005 that the heirs of the penalty is already fixed based on agreement.
Feliciano expressly prohibited the heirs of Hermogenes from
entering the property. Thus, as aptly ruled by the CA, the right 1229. Equitable reduction of penalty:
of the heirs of Hermogenes to demand the partition of the 1. There has been partial performance.
property had not yet prescribed 2. There has been irregular performance.
3. Even if no performance, but the penalty agreed is
There is likewise no merit to the claim that the action for iniquitous or unconscionable.
partition filed by the heirs of Hermogenes amounted to a
collateral attack on the validity of OCT No. P-10737. The 1230. The nullity of the penal clause does not carry with the
complaint for partition filed by the heirs of Hermogenes seeks nullity of the principal obligation, but the latter’s nullity nullifies
first, a declaration that they are a co-owner of the subject the penal clause.
property, and second, the conveyance of their lawful shares.
The heirs of Hermogenes do not attack the title of Feliciano; PRYCE CORPORATION v. PAGCOR
they alleged no fraud, mistake, or any other irregularity that Was there a penal clause in this case? What did it consist?
would justify a review of the registration decree in their favor.
On the premise that they are co-owners, they can validly seek FLORENTINO v. SUPERVALUE
the partition of the property in coownership and the Was there a penal clause in the lease contract? Was it proper
conveyance to them of their respective shares. for Supervalue for retaining the equipment?

A Trustee Who Obtains a Torrens Title over a Property DIAMOND BUILDERS v. COUNTRY BANKERS
Held in Trust Cannot Repudiate What did the penal clause constitute?
Feliciano registered the subject property in his name, to the
exclusion of the other heirs of Hermogenes, an implied trust
was created by force of law and he was considered a trustee of
the undivided shares of the other heirs of Hermogenes in the
property. As trustees, the heirs of Feliciano cannot be permitted
to repudiate the trust by relying on the registration. “A trustee
who obtains a Torrens title over a property held in trust for
him by another cannot repudiate the trust by relying on the
registration.”

OBLIGATIONS WITH A PENAL CLAUSE (1226-1230)

The penal clause is an accessory undertaking to strengthen the


coercive force by imposing greater responsibility upon non-
fulfillment. The penalty might come in the form of:
1. Money
2. Performance of an act
3. Forfeiture

Diamond Builders – the agreement between Acidre and Borja


is actually one of penalty in the form of forfeiture.

1226. As a general rule, the creditor is not entitled to both


penalty and the principal undertaking, subject to the following:
1. When the debtor refuses to pay penalty
2. Guilty of fraud in the fulfillment of the obligation
3. By express stipulation.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 78

OBLIGATIONS AND CONTRACTS 2. Other causes mentioned under Article 1231 but
Civil Code governed under other Chapters of the code
a. Annulment
Articles 1231-1251
b. Rescission
CHAPTER 4 c. Fulfillment of a resolutory condition
EXTINGUISHMENT OF OBLIGATION d. Prescription
3. Still other causes
ARTICLE 1231 a. Death of a party in case the obligation is a
Obligations are extinguished; personal one (singer under contract)
(1) By payment or performance; b. Resolutory term
(2) By loss of the thing due;
c. Change of civil status
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of the d. Compromises
creditor and debtor; e. Mutual dissent
(5) By compensation; f. Impossibility of fulfillment
(6) By novation. g. Fortuitous event

Other causes of extinguishment of obligations, such as Case: Stronghold Insurance v. Republic Asahi (2006)
annulment, rescission, fulfillment of a resolutory condition,
Facts: Republic Asahi Glass contracts with JDS for the
and prescription, are governed elsewhere in this Code.
construction of roadways and systems for the former’s
Classification by Causes of Extinguishment of Obligations compound. Stronghold acted as surety. JDS falling behind
Voluntary Causes schedule, Republic Asahi sough to rescind the contract and
a. Performance demand the compliance bond. The owner of JDS died, and
a. Payment or performance JDS disappeared. Stronghold as surety refused to pay and
b. Consignation contends that the death of Santos, the bond principal is
b. Substitution of Performance exintguished including the surety.
a. Compensation
b. Novation Rule: Santos’s death did not extinguish the obligation. As a
c. Dacion en pago (datio in solutum) general rule, the death of either creditor or debtor does not
c. Agreement to release extinguish the obligation. Obligations are transmissible to
a. Subsequent to obligation heirs, except when prevented by law, stipulation or nature of
i. Unilateral waiver the obligations. Only personal obligations are extinguished
ii. Natural waiver by the death of party.
iii. Remission
iv. Mutual dissent Whatever Santos had under his contracts were passed onto
v. Compromise his estate. Death is not a defense that he or his estate can
b. Simultaneous with creation of obligation set up to wipe out the obligations under the performance
i. Resolutory term or extinctive period bond. Consequently, Stronghold as surety cannot use his
ii. Resolutory condition or subsequent death to escape the monetary obligation under bond.

Involuntary Causes SECTION 1. – PAYMENT OR PERFORMANCE


a. By failure to bring an action (e.g. prescription)
ARTICLE 1232
b. Resolutory condition or condition subsequent Payment means not only the delivery of money but also the
a. Merger or confusion performance, in any other manner, of an obligation.
b. Personal obligations (death or insanity)
c. Change of civil status (marriage or widow) Payment, Concept
c. By reason of the object Payment is the fulfillment of the prestation due, a fulfillment
a. Impossibility of the performance that extinguishes the obligation by the realization of the
b. Loss of the thing due purposes which it was constituted. It is a juridical act which is
voluntary, licit, and made with the intent to extinguish an
Classification under the Civil Code obligation. Payment and fulfillment are identical.
1. Ordinarily by a. Delivery of money
a. Payment or performance b. Performance in any other manner of an obligation
b. Loss of the thing due
c. Condonation or remission Requisites of Payment
d. Confusion or merger 1. The person who pays
e. Compensation 2. The person to whom payment was made
f. Novation 3. The thing to be paid in full
4. Propriety of manner, time and place of payment
5. Acceptance of payment by the creditor
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 79

Kinds of Payment NOTE: This article usually applies when rescission is not possible
1. Normal or voluntary when the obligor or debtor for there was only a slight or casual breach, leaving only the
voluntarily performs the prestation stipulated. fulfillment of obligation subject to damages.
2. Abnormal or involuntary when the creditor institutes
an action to collect payment. ARTICLE 1235
When the obligee accepts the performance, knowing its
ARTICLE 1233 incompleteness or irregularity, and without expressing any
A debt shall not be understood to have been paid unless the protest or objection, the obligation is deemed fully complied
thing or service in which the obligation consists has been with.
completely delivered or rendered as the case may be.
Estoppel on the Creditor’s Qualified Acceptance
Requisites of a Valid or Complete Payment There is the presence of waiver and estoppel. There must be
The article states two requisites for payment: qualified acceptance of incomplete or irregular payment. A
1. The very thing or the service due must be delivered or mere receipt for payment does not constitute such
released or paid (Identity of the Prestation) acquiescence to such irregularity.
2. Fulfillment must be complete (Integrity of Prestation)
This usually happens when the creditor accepts the
How Payment is Made performance despite having knowledge of the incompleteness
Monetary Obligation Delivery of money, full or irregularity of such performance or payment. He is deemed
payment unless otherwise to have waived the irregularity, because the law requires that
stipulated in agreement. the must know such and accept without protest or objection.
Delivery of things Delivery of such thing,
unless partial delivery is ARTICLE 1236
The creditor is not bound to accept payment or performance
agreed upon by parties.
by a third person who has no interest in the fulfillment of the
Personal Undertaking Performance of the obligation, unless there is a stipulation to the contrary.
undertaking
Obligation of not to do Refraining from doing the Whoever pays for another may demand from the debtor
action what he has paid, except that if he paid without knowledge
or against the will of the debtor, he can only recover only
Proof of Payment insofar as the payment has been beneficial to the debtor.
The burden of proving that it has been extinguished by
Creditor’s Right to Refuse Payment by Third Person
payment devolves upon the debtor who offers such defense to
The creditor can refuse payment from a third person, or a
the claim of the plaintiff creditor. The issuance of receipt is a
stranger. With this the creditor cannot be compelled to accept
consequence in good faith which must be observed.
the performance by a person not bound under the obligation.
There are however exceptions:
Acceptance of Partial Payments, Waiver of 1233
1. If there is a stipulation allowing this;
A debtor cannot compel the creditor to accept partial payment.
2. If said third person has an interest in the fulfillment of
But he can accept partial payment. If he voluntarily accepts the
the obligation (co-debtor, joint debtor, guarantor).
partial payment, he is deemed to have waived the requirements
under Article 1233 that the performance be complete.
Right of the Third Person
• Exceptions under 1234 and 1235.
The person who pays the account of another may recover form
the debtor the sum so paid. This is when the debtor knows that
ARTICLE 1234
If the obligation has been substantially performed in good another has paid his obligation and does not object. If debtor
faith, the obligor may recover as though there had been a has no knowledge or expresses opposition, the law limits his
strict and complete fulfillment, less damages suffered by the recovery by which the debtor has been benefited.
obligee.
To reiterate, the third person may pay:
Substantial Performance a. With the knowledge and consent of the debtor which
In this article, must be substantial performance of an obligation the payor is entitled to reimbursement and
done in good faith. If there is such on the part of the obligor, subrogation to such rights.
then the obligor can recover as though there had been a strict b. Without the knowledge of the debtor or against his
and complete fulfillment less the damages suffered by creditor. will, where the payor is not entitled and only allowed
for beneficial reimbursement.
The omission must be slight and unimportant meaning that it
must not be material so as to frustrate the accomplishment of Illustration. If Matt pays for Jade’s transportation fare, without
the intended work or obligation. There must be no willful or Jade’s knowledge or against his will, and later discovers that
intentional deviation from the contract or prestation by the Jade was entitled to a 50% discount on the fare. Is it correct to
debtor, and the omission or defect must not be material, say that X can only recover the half fare even if he had paid the
otherwise the performance is not considered as substantial. full fare when X is at fault in this situation?
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 80

No. This is not solutio indebiti because the 50% non-discounted Illustrative Problem: Right of Mortgage
fare was really due. Thus, X’s right against Y is for such. But the Olivia borrowed P1,000,000 from Clara. The loan was secured
discounted fare was not even due and is an undue payment or by a mortgage of Olivia’s land in favor of Clara. Without the
solutio indebiti which can be properly recovered. knowledge of Olivia, Christine paid to Clara the sum of
P1,000,000 for Olivia’s debt to which such payment she
Instances When Recovery Can be From the Creditor clearly has benefited from.
a. When the debt has prescribed
b. When the debt has been remitted Q1. May Christine claim reimbursement from Olivia? If yes, how
c. When the debt has already been paid much? If no, why?
d. When legal compensation took place
A1. Yes, she can claim reimbursement from Olivia inasmuch as
Illustration of Beneficial Reimbursement she had paid, because the facts show that she benefited on the
June owes July P1M. Later, June paid P700K leaving a balance whole payment, which is covered under beneficial
of P300K. August, a classmate of June, intending to surprise reimbursement even without the knowledge of Olivia.
him, paid the sum of P1M thinking that June still owed B that
amount. He did this without the knowledge of June. Q2. If Olivia cannot pay Christine, can Christine foreclose the
mortgage secured by Olivia’s land?
A: August can only recover only P300,000 from June, because
it is only up to this amount June has benefited. August however, A2. No. Christine cannot foreclose the mortgage on Olivia’s
can recover the remaining P700,000 from July, for she should land. It is true that the original creditor was Clara, and she
not have accepted the full payment for it was already partially clearly had the right to foreclose in case of non-payment.
paid by June. If it was found that July was in bad faith, she will
be liable not only for the P700K but also for damages. But in this case, the new creditor Christine has not been
subrogated of the right of Clara even if she had paid for the
Effect on Prescription Due to Partial Payment of Third Party whole loan.
Orange owes Blue a sum of money. And without Orange’s
knowledge, Yellow paid a part of Orange’s debt. So, there is still The only right she has is reimbursement but not subrogation.
a remainder. The facts show that she performed the payment as a third party
without the knowledge (or against the will) of Olivia.
The payment of Yellow of the part of Orange’s debt does not
prevent the running of the prescriptive period because there is in Article 1237 clearly words out that “whoever pays without the
no may Orange could have had acknowledged the existence of knowledge or the will of the debtor cannot compel the creditor to
such debt [Agoncillo v. Javier]. subrogate to him in his rights, such as those in mortgage.”

ARTICLE 1237 Illustrative Problem: Guarantor


Whoever pays on behalf of the debtor without the knowledge Allen owes Bea the sum of P1,000,000. Chris is a guarantor
or against the will of the latter, cannot compel the creditor to of Allen. Allen was able to pay P400,000. Therefore, P600,000
subrogate him in his rights, such as those arising from
remains as balance. Diana, Allen’s girlfriend, thinking that
mortgage, guaranty, or penalty.
Allen still owes P1,000,000 paid the whole amount to Bea,
Subrogation against the will of Allen.
Subrogation is defined as the act of putting somebody into the
shoes of the creditor, enabling the former to exercise all the Q1. May Diana recover from Allen? If so how much?
rights and actions that could have been exercised by the latter. A1. Yes. Diana may recover from Allen. Diana can only recover
P600,000 because it was done against his will, thus she can only
It transfers to the person subrogated the credit with all the right have beneficial reimbursement and such amount was such
thereto appertaining, either against the debtor or against third Allen benefited for.
persons, be guarantors, possessor of mortgages (Art. 1307).
However, Diana can recover from Bea the P400,000 because
In cases where subrogation takes place by virtue of the Bea already received such and it would be tantamount to unjust
payment of the credit, the payor actually steps into the shoes enrichment.
of the creditor and becomes entitled, not only to recover what
he has paid, but also to exercise all rights which the creditor Q2. If Allen cannot pay Diana, can Diana proceed against the
could have exercised. In this, there is no extinguishment of guarantor Chris in such case?
obligation but a change in the active subject.
A2. No. Diana cannot ordinarily proceed against guarantor
Rights that Person Subrogated Can Exercise Chris because Diana paid the obligation of Allen against the will
a. A mortgage of Allen which makes her not entitled to subrogation of Bea’s
b. A guaranty rights towards the guarantor.
c. A penalty or penal clause
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 81

Subrogation from Reimbursement EXCEPTION: Article 1247 of the Civil Code which provides that:
Subrogation Reimbursement When a minor who has entered into a contract without the
Recourse can be had to the There is no such recourse. consent of the parents or guardian, voluntarily pays a sum of
mortgage, guaranty or money or delivers a fungible thing in fulfillment of an
pledge. obligation, there shall be no right to recover the same from the
Debt is exintguished in one The new creditor has obligee who has spent or consumed it in good faith.
sense, for there is a new different rights, so it is as if
creditor but with the exactly there has been an Example. Junjun entered in a contract with Dave which obliged
same rights as the old one. extinguishment of the former to pay P1 Million. Dave did not know of Junjun’s
obligation on the old minority. After payment, Dave spent P800K. Later, Junjun’s
creditor. parents knew of such. The parents can only recover the
There is something more Limited only to the personal remaining P200K for it was done in good faith.
than personal recovery. action to recover amount.
ARTICLE 1240
ARTICLE 1238 Payment shall be made to the person in whose favor the
Payment made by a third person who does not intend to be obligation has been constituted, or his successor in interest,
reimbursed by the debtor is deemed to be a donation, which or any person authorized to receive it.
requires the debtor’s consent. But the payment is in any case
valid as to the creditor who has accepted it. To Whom Payment Must be Made
1. To the person who favor the obligation has been
No Intention to be Reimbursed, Requires Debtor’s Consent constituted or the creditor.
No one should be compelled to accept the generosity of 2. To the successor-in-interest (like the heirs)
another. If the creditor accepts then the payment and against 3. To any person authorized (by agreement or by law)
the will or absent the knowledge, Articles 1236 shall apply.
NOTE: If the payment made by the third person without NOTE: Culaba case, transmission of right to receive cannot be
intention to be reimbursed exceed P5,000, where the law carried over by the wife in the second marriage.
requires that payment must be in writing to be considered as a
valid donation, payment is still valid. Case: PNB v. Court of Appeals and Tan (1996)
Facts: On 1978, after an expropriation proceeding, PNB was
Illustration: Payment by Stranger Deemed as Donation required by the trial court to pay Tan the amount of P32.4K.
Alvin owes Beth P1 Million. Crystal, in behalf of Alvin, pays PNB through its Assistant Manager Tagamolila, without
Beth P1 Million against the consent of Alvin, although Crystal Tan’s knowledge nor consent, delivered the check to one
already told that she did not intend to be reimbursed. Beth Sonia Gonzaga, which the latter deposited such in her
however, accepted Crystal’s payment. account and withdrew such amount.

Q1. Is Alvin’s obligation towards Beth extinguished? Upon demand by Tan, PNB argued that it already paid to
A1. Yes. Alvin’s obligation to Beth is extinguished even if Alvin Gonzaga on the strength of the SPA executed by him in favor
did not consent to the donation. The law says that the payment of her.
is in any case valid as to the creditor who accepted such.
Held: PNB did not perform payment. As required by Article
Q2. May Crystal recover from Alvin, because of the fact that 1233, a debt shall not be understood to have been paid
Alvin did not consent to what the law defines as donation on unless the obligation is completely delivered. The burden of
the part of Crystal in favor of Alvin? proof rests on PNB alleging full payment. In this case, neither
A2. Yes. As held again, to make Article 1238 operable, it the SPA nor the check was ever presented in court.
requires the debtor’s consent. Given this, there is no real
donation whatsoever. It is to be remembered however, Article ARTICLE 1241
1236 provides that when such payment is against the will of the Payment to a person who is incapacitated to administer his
property shall be valid if he has kept the thing delivered, or
debtor, then Beth can recover under beneficial reimbursement.
insofar as the payment has been beneficial to him.
ARTICLE 1239 Payment made to a third person shall also be valid insofar as
In obligations to give, payment made by one who does not it has redounded to the benefit of the creditor. Such benefit
have free disposal of the thing due and capacity to alienate it to the creditor need not be proved in the following cases:
shall not be valid, without prejudice to the provision of (1) If after the payment, the creditor acquires the
Article 1427 under the Title on “Natural Obligations.” creditor’s rights;
(2) If the creditor ratifies the payment to the third
Payment BY an Incapacitated Person person;
GENERAL RULE: If a person paying has no capacity to give then: (3) If by the creditor’s conduct, the debtor has been led
a. Payment is not valid – if accepted. to believe that the third person had authority to
b. Creditor cannot even be compelled to accept it. receive the payment.
c. The remedy of consignation will not be proper.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 82

I. Payment TO Incapacitated Persons Case: NPC v. Ibrahim (2015)


Such payment is valid only when: Rule: In an expropriations case, the Court finds
(1) if the incapacitated person kept the thing delivered Magondadato the ‘possessor of credit’ with respect to the
(2) insofar the payment has been beneficial to hi, rental fees and expropriation indemnity adjudged to the
subject land. If the Ibrahims and Maruhoms turn out to be
Illustrative Problem: Payment to Incapacitated Person the real owners it can still validly extinguish the obligation
Anton owes Bell P1,000,000. When Anton paid Belle, the for such was done in good faith to a person in possession of
latter was already insane. However, the money was never the credi which releases the debtor.
spent and still in her possession.
ARTICLE 1243
Q1. Is the obligation of Anton extinguished? Payment made to the creditor by the debtor after the latter
has been judicially ordered to retain the debt shall not be
valid.
A1. Yes. Anton’s obligation is already extinguished by virtue of
his payment to Belle.
Garnishment, Defined
It is the proceeding in which a debtor’s creditor is subjected to
True, she may have been incapacitated by insanity to administer
the payment of his own debt to another. It consists in the
her property, but she kept the thing delivered. Hence, payment
citation of some stranger to the litigation, who is the debtor of
is valid.
one of the parties to the action. Such debtor-stranger becomes
a forced intervenor, and the court, such citation for him to pay
Q2. Supposes that a swindler had asked Belle for P1,000,000 in
his debt, not to his former creditor, but to the new creditor, who
exchange of P500,000. Does Anton’s payment remain valid?
is the creditor in the main litigation. This is such what is called
garnishment.
A2. Valid only until P500,000 which is the amount which Belle
Example. A owes B P1,000,000. In turn, B owes C P100,000. C
has benefited from. A good example of beneficial payment is
brings an action against B who claims insolvency but admits the
when the money has been used for proper hospital or
credit he has over A. Before A pays B, A is summoned into the
psychiatric expenses.
proceedings, and asked to retain the debt in the meantime.
Thus, the debt here is garnished.
II. Payment TO a Third Party Not Duly Authorized
• A should not pay B and instead he should pay C, if C
The payment is valid only to the extent of benefit, which can be
shall be adjudged as the creditor of B. Any payment
financial, moral or intellectual to the creditor. It is not presumed
made by A to B in the meantime is considered void.
except under the tree instances under Article 1241.
Interpleader, Defined
1. If after the payment, the third person acquires the
It is an action in which a certain person in possession of a
creditor’s rights.
certain property wants claimants to litigate among themselves
2. If the creditor ratifies the payment to the third person.
for the same.
3. If by the creditor’s conduct, the debtor has been led
to make the payment.
Example. Arnold has in his possession some merchandise, to be
delivered to the person who presents the proper receipt. Bea
Other Instances
and Chris, each armed with a receipt, ask Arnold to turn over
• When there is a new creditor, but the old creditor
the property to one of them. After an examination of the
failed to inform the debtor and the performance was
receipts it shows that they are identical. Arnold then does not
made to him.
know to whom property should be delivered. Thus, filing an
action to which Bea and Chris settle conflicting rights.
• Article 1242, when the payment is made to a third
• Courts then must issue and order prohibiting payment
person in possession of the credit. (Possession of
to either Bea or Chris in the meantime.
check v. identity in the Promissory Note)
Injunction, Defined
ARTICLE 1242
It is a judicial process by which a person is generally ordered to
Payment made in good faith to any person in possession of
the credit shall release the debtor. refrain from doing something. It is called a preliminary
injunction if the prohibition is during the pendency of the
Requisites of Article 1242 proceedings.
1. Payment by payor must be in good faith.
2. Payee must be in possession of the credit itself not ARTICLE 1244
merely the document evidencing the credit. The debtor of a thing cannot compel the creditor to receive a
different one, although the latter may be of the same value
as, or more valuable than that which is due.
Example. A promissory note is not a possession of credit itself
but possession of the evidence of the credit. In obligations to do or not to do, an act of forbearance cannot
be substituted by another act or forbearance against the
obligee’s will.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 83

Debtor Cannot Compel Creditor to Accept New Object Greater freedom in Less freedom in determining
• Even if it is same value or more valuable. determination of price. price.
• Cannot be substituted by another act Giving of the price may The giving of the object in
generally end the obligation lieu of the credit may
Exceptions where 1244 Does Not Apply of the buyer. completely or partially
a. In case of facultative obligations extinguish the obligation.
b. In case there is another agreement resulting in either
a. Dation in payment (1245) Dation in Payment from Assignment
b. Novation (1291) Assignment under 1255 is similar to 1245 because both
c. In case of waiver by the creditor involves substitute performance of an obligation. However,
unlike assignment which is for the benefit of the creditors,
ARTICLE 1243 dation in payment does not concern itself with such, and it does
Dation in payment, whereby property is alienated to the not suppose a situation of financial difficulty because it can be
creditor in satisfaction of a debt in money, shall be governed
done even when the debtor is not insolvent. It merely involves
by the law of sales.
a change of the object of the obligation of the parties and at
Dation in Payment, Defined the same time fulfilling the same voluntarily.
It is the mode of extinguishing obligation whereby debtor
alienates in favor of the creditor, property for satisfaction of Dation in Payment from Pledge
monetary debt. It is the delivery and transmission of ownership There is a presumption in favor of pledge, which involves lesser
of a thing as an accepted equivalence of the obligation. It is also transmission of rights. In case where personal property is
known as datio in solutum or adjudicacion en pago. delivered to the creditor, the transaction is a pledge. When
there is delivery, the presumption is that the money is merely a
Application: It usually happens when at the time of the pledge not to secure a debt.
ARTICLE 1246
constitution of the obligation what is due is money, but at the
When the obligation consists in the delivery of an
time of the fulfillment, the debtor could no longer deliver the
indeterminate or generic thing, whose quality and
money. So instead of offering the money, he will deliver another circumstances have not been stated, the creditor cannot
ting in lieu of the money. If the creditor accepts, then the demand a thing of superior quality. Neither can the debtor
obligations is extinguished, depending on the agreement. deliver a thing of inferior quality. The purpose of the
obligation and other circumstances shall be taken into
If it extinguishes the whole obligation, then there is full consideration.
extinguishment, but if it only based on the value of the thing
delivered, and if it is not sufficient, then there is partial Determination of Quality
fulfillment in such situation. If there is disagreement between the quality of the thing
delivered in the obligation to deliver generic things, the court
Requisites for a Valid Dation in Payment shall decide to take into consideration the purpose and other
1. If creditor consents circumstances.
2. If dation in payment will not prejudice other creditors
3. If debtor is not judicially declared insolvent Waiver
If the contract does not specify the quality
Dation in Payment and Sale • Creditor cannot demand a thing of superior quality
In 1245, this is so because such partakes the nature of a sale, (but may demand and accept one of inferior)
for the creditor is really buying some property of the debtor, • Debtor cannot deliver a thing of inferior quality (he
payment for which is to be charged against the debtor’s debt. may deliver one of superior quality)
It can be also called a novation. Sale and novation both requires
common consent. NOTE: When the kind and quantity and not only quality cannot
be determined new agreement, the contract shall be void.
Sale Dation in Payment
ARTICLE 1247
There is no pre-existing There is a pre-existing credit. Unless it is otherwise stipulated, the extrajudicial expenses
credit. required by the payment shall be for the account of the
This gives rise to This extinguishes debtor. With regards to judicial costs, the Rules of Court shall
obligations. obligations. govern.
The cause or consideration: The cause of consideration:
Viewpoint of the seller Viewpoint of the debtor GENERAL RULE: The debtor must pay for the extrajudicial
Price Extinguishment of debt expenses incurred during the payment. Because of law, it is the
debtor who benefits primarily, since his obligation is thus
Viewpoint of the buyer Viewpoint of the creditor extinguished.
Object Acquisition of object offered
in credit. EXCEPTION: When there is a stipulation to the contrary. With
regards to the judicial costs, Rules of Court shall govern.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 84

ARTICLE 1248 NOTE: This article only applies when there is a contract or
Unless there is an express stipulation to the effect, the agreement involved. This does not apply when it arises from
creditor cannot be compelled to partially to receive the law or independent from contracts like quasi-delicts, quasi-
prestations in which the obligation consists. Neither may the
contracts.
debtor be required to make partial payments.

However, when the debt is in part liquidated, and in part ARTICLE 1251
unliquidated, the creditor may demand, and the debtor may Payment shall be made in the place designated in the
effect the payment of the former without waiting for the obligation.
liquidation of the latter.
There being no express stipulation and if the undertaking is
to deliver a determinate thing, the payment shall be made
GENERAL RULE: Performance should be generally complete.
wherever the thing might be at the moment the obligation
was constituted.
EXCEPTIONS: Partial performance is allowed when:
1. When there is a stipulation to his effect. In any other case the place of payment shall be the domicile
2. When the different prestations are under different of the debtor.
conditions or different terms (installments)
3. Part liquidated, part unliquidated. (sum and damages) If the debtor changes his domicile in bad faith or after he has
4. Joint debtor pays his share, or joint creditor demands. incurred delay, the additional expenses shall be borne by
5. When solidary debtor pays only the part demandable him.
due to other debtor’s subject to different conditions.
The provisions are without the prejudice to venue under the
6. Compensation, larger debt than other – balance. Rules of Court.
7. When work is to be done by parts. Where Payment Must be Made
ARTICLE 1249 1. If there is a stipulation – to the place designated.
The payment of debts in money shall be made in the currency
2. If there is no stipulation:
stipulated, and if its not possible to deliver such currency,
then in the currency which is legal tender in the Philippines. a. If it is an obligation to deliver a determinate
specific thing then in the place where the
The delivery of promissory notes payable to order, or bills of thing might be usually or habitually at the
exchange or other mercantile documents shall produce the time obligation was constituted. (If
effect of payment only when they have been cashed, or when temporarily there, or under shipping, then
through the fault of the creditor they have been impaired. the domicile of the debtor).
b. If the obligation is any other thing (generic,
In the meantime, the action derived from the original
obligation shall be held in abeyance. money or personal), delivery must be made
at the domicile of the debtor.
Legal Tender
It is that which a debtor may compel a creditor to accept in Expenses: The creditor shall bear expenses. Unless the debtor
payment of the debt. It means such currency which in a given in bad faith or has incurred in delay changes domicile, then the
jurisdiction can be used for the payment of debts, public and expenses shall be borne by him.
private, and which cannot be refused by the creditor.
Q. What if the payment was done through couriers (e.g. LBC)
Stipulation in Another Currency and the debtor sent the money through a courier but was taken
This provision has been amended by RA 4100. Before the away. Who shall bear the loss?
effectivity of RA 4100, RA 529 generally prohibited payment in
foreign currency, including dollars, it must be converted. A. It depends. If the creditor requested such mode of payment,
then he shall bear the loss, and then he can run after the courier
Delivery of Commercial Instruments for payment. However, if it is the debtor who initiated such
Check is not a legal tender. Therefore, the creditor cannot be mode of payment, the law clearly provides that in the absence
compelled to accept payment through this means, even by of stipulation, the payment of generic thing should be made in
consignation in court. Even a bank manager’s check is not legal the domicile of the debtor.
tender. The following are considered as legal tender:
• When creditor in estoppel or promised accept check.
• When the check has lost value due to the fault of the
creditor (delayed presentation or encashment)
• When payment by conventional redemption.

ARTICLE 1250
In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of the
currency at the time of establishment of the obligation shall
be the basis of the payment, unless there is an agreement to
the contrary
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 85

OBLIGATIONS AND CONTRACTS An issue is factual when the doubt or difference arises as to the
Articles 1231-1251 truth or falsehood of alleged facts, or when the query invites
calibration of the whole evidence, considering mainly the
JURISPRUDENCE NOTES
credibility of witnesses, existence and relevancy of specific
surrounding circumstances, their relation to each other and to
1231 -1232. Payment or Performance
the whole, and the probabilities of the situation. Time and
again, we stress that this Court is not a trier of facts and
AGNER v. BPI FAMILY SAVINGS BANK (2013)
generally does not weigh anew evidence which lower courts
have passed upon.
Facts: On February 15, 2001, petitioners Sps. Deo Agner and
Maricon Agner executed a Promissory Note with Chattel Second Issue: Both verbal and written demands were made
Mortgage in favor of Citimotors, Inc. The contract provides prior to the institution of the case against petitioners.
that: for receiving P834,768 petitioners shall pay P17,391 every
15th day of each succeeding month until fully paid. The loan is Even if there was no demand letter, there is really no need for
secured by a 2001 Mitsubishi Adventure Super Sport, and an it because the petitioners legally waived the necessity of notice
interest of 6% per month shall be imposed for failure to pay or demand in the Promissory Note with Chattel Mortgage
each install on or before the stated due date. which provides that:
In case of my/our failure to pay when due and payable, any
Citimotors, Inc. assigned all its rights, title and interests in the sum which I/We are obliged to pay under this note and/or
any other obligation which I/We or any of us may now or in
PN with Chattel Mortgage to ABN AMRO Savings Bank which
the future owe to the holder of this note or to any other
on May 31, 2002, likewise assigned the same to respondent BPI party whether as principal or guarantor x x x then the entire
Family Saving Bank, Inc. sum outstanding under this note shall, without prior
notice or demand, immediately become due and
For failure to pay four successive installments from May 15, payable.
2002 to August 15, 2002, respondent, through counsel, sent a
demand letter on August 29, 2002 declaring the entire Even though Article 1169 requires demand to put debtor in
obligation due and demandable requiring to pay P576,664.04 delay. However, the law expressly provides that demand is not
or surrender the mortgaged vehicle immediately upon necessary under certain circumstances, and one of these
receiving the latter. As the demand was left unheeded, circumstances is when the parties expressly waive demand.
respondent filed an action for Replevin and Damages before Hence, since the co-signors expressly waived demand in the
the Manila RTC. A writ of replevin was issued, but the subject promissory notes, demand was unnecessary for them to be in
default.
vehicle was not seized. Trial on the merits ensued.

RTC ruled for the respondent and ordered petitioners to jointly CONTENTION: They have not received a demand letter.
and severally pay the outstanding amount plus interest rate of REASONING: Completely inconsequential, because the mere act
72% per year from August 20, 2002 until fully paid. CA affirmed. of sending it would suffice, as stated in the Promissory Note
with Chattel Mortgage.
Issues The mere act of sending any correspondence by mail or by
personal delivery to the said address shall be valid and
(1) Respondent has no cause of action, because the Deed
effective notice to the mortgagor for all legal purposes and
of Assignment executed in its favor did not specifically
the fact that any communication is not actually received by
mention ABN AMRO’s account receivable from the MORTGAGOR or that it has been returned unclaimed to
petitioners. the MORTGAGEE or that no person was found at the address
(2) Petitioners cannot be considered to have defaulted in given, or that the address is fictitious or cannot be located
payment for lack of competent proof that they received shall not excuse or relieve the MORTGAGOR from the effects
the demand letter. of such notice.
(3) Respondent’s remedy of resorting to both actions of
replevin and collection of sum is contrary to Article In addition, they did not change address from the time they
1484 of the Civil Code and the Elisco Tool ruling. executed the Promissory Note with Chattel Mortgage up to the
time the case was filed against them.
Discussion: The contentions are untenable.
EVIDENCE: Petitioners did not take advantage of all the
First Issue: Matter is settled, SC not a trier of facts. opportunities to present their evidence. They miserably failed
With respect to the first issue, it would be sufficient to state that to produce the original cash deposit slips proving payment of
the matter surrounding the Deed of Assignment had already the monthly amortizations in question. Not even a photocopy
been considered by the trial court and the CA. Likewise, it is an of the alleged proof of payment was appended. Neither have
issue of fact that is not a proper subject of a petition for review they demonstrated any written requests to respondent to
under Rule 45. furnish them with official receipts of SOA.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 86

One Who Pleads Payment has the Burden of Proving It In his Answer, Martinez alleged that he had already paid his
Jurisprudence abounds that, in civil cases, one who pleads loan through deductions made from his compensation/salaries,
payment has the burden of proving it; the burden rests on the bonuses and commission. During trial, respondent presented a
defendant to prove payment, rather than on the plaintiff to certification dated September 10, 1996 issued by the
prove non-payment. When the creditor is in possession of the petitioner’s president Helen Dy, stating that respondent
document of credit, proof of non-payment is not needed for it already paid the amount of P337,650 as of the said date. He
is presumed. alleges that a simple accounting would show he has paid it off
for it was payable within four years from 1994.
IN THE CASE: Respondent’s possession of the PN with CM
strongly buttresses its claim that the obligation has not been RTC. It ruled in favor of the petitioner Multi-International,
exintguished. The creditor’s possession of the evidence of ordering defendant to pay pointing out that respondent failed
debt is proof that the debt has not been discharged by to present evidence to prove payment. He was not able to
payment. A promissory note in the hands of the creditor is establish the due execution and authenticity of the certification.
a proof of indebtedness rather than proof of payment. It is
prima facie evidence that the promissory note had not been CA. Reversed RTC ruling and ruled in favor of the respondent.
paid (citing BPI v. Spouses Royeca). The CA found credence on the (1) certification, (2) deduction
and (3) petitioners’ admission of respondent installment
Indeed, when the existence of a debt is fully established by the payments made in the amount of P230,275.22. Dy never denied
evidence contained in the record, the burden of proving it has nor confirmed in open court the authenticity of signature. It
been extinguished devolves upon the debtor who offers dismissed the complaint for lack of merit.
such defense to the claim of the creditor. The debtor has
the burden of showing with legal certainty that the Issues:
obligation has been discharged by payment. 1. Whether respondent has fulfilled his obligation with
petitioner; and
HELD: WHEREFORE, the petition is DENIED and the Court 2. Whether the certification dated September 10, 1996
AFFIRMS WITH MODIFICATION the April 30, 2007 Decision and should be basis for respondent’s payment of his loan
May 19, 2008 Resolution of the Court of Appeals in CA-G.R. CV with petitioner.
No. 86021. Petitioners spouses Deo Agner and Maricon Agner
are ORDERED to pay, jointly and severally, respondent BPI Discussion: The petition is partly meritorious.
Family Savings Bank, Inc. (1) the remaining outstanding balance
of their auto loan obligation as of May 15, 2002 with interest at Conflicting Factual Findings of Lower Courts
one percent (1 o/o) per month from May 16, 2002 until fully Trial court found that no deductions were made from the salary
paid; and (2) costs of suit. while the CA found otherwise. Thus, the conflicting factual
findings of the trial court and CA compel us to re-evaluate the
MULTI-INTERNATIONAL BUSINESS v. MARTINEZ (2015) facts of this case, an exception to the rule that only questions
of law may be dealt with in a petitioner for certiorari.
Facts: Respondent Ruel Martinez was the Operations Manager
of petitioner from last quarter of 1990 to January 22, 1999. Admissibility of the Certification
Sometime in June 1994, respondent Martinez applied for and Dated September 10, 1996
was granted a car loan amount to P648,288. Both parties Respondent relies on the certification to bolster his defense
agreed that the loan was payable through deductions from that he already fully paid his car loan to petitioner. We affirm
respondent’s bonuses or commissions, if any. the findings of the CA that the certification is admissible in
evidence.
Further, if respondent would be terminated for any cause
before the end of the term of the loan obligation, the unpaid The rules allowed court to compare the handwriting in issue with
balance would be immediately due and demandable without writings admitted or treated as genuine whom the evidence is
the need of demand. offered or proved to be genuine to the satisfaction of the judge.
• November 11, 1998 letter on outstanding balance
after deductions stand at P418,012.78. EVIDENCE: The documents containing the signature of Dy:
• January 22, 1999 Martinez received termination 1. Letter of November 11, 1998
effectively immediately and demanded that 2. Termination letter of January 22, 1999
respondent pay his outstanding loan of P418,012.78. 3. Promissory Note dated June 17, 1994
Despite this, respondent failed to pay the outstanding balance. 4. Chattel Mortgage signed on June 27, 1994

On June 23, 1999, the petitioner demanded again to pay his Examining and analyzing the signatures in these documents
loan within tree days from receipts. But still failed to pay. Thus with Dy’s signature in the certification, we find no substantial
on July 12, 1999, RTC Makati petitioner filed a complaint against reason to doubt the latter’s authenticity. In fact, the testimonies
Martinez for the payment of the outstanding balance. of Dy herself and Valle support our finding.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 87

Dy never testified that any forgery or fraud attended the HELD: Having only proven payment to the extent of P337,650
certification. She did not deny the authenticity and even respondent is obligated to pay petitioner of the balance of
admitted that her signature looks like hers. Valle, as witness also P310,638 with interest.
noticed the similarity and positively identified.
Wherefore, the instant petitioner is partially granted. CA
Insufficient Evidence to Prove decision is set aside and respondent is order to pay petitioner
Full Payment of Loan the amount with 6% interest per annum and the trial court
decisions is affirmed in other respects.
One Who Pleads Payment Has the Burden of Proving It
Even where the creditor alleges non-payment, the general rule CINCO v. COURT OF APPEALS (2009)
is that the debtor has the burden to prove payment, rather than
the creditor. The debtor has the burden of showing with legal Facts: In December 1987, petitioner Manuel Cinco obtained a
certainty that the obligation has been discharged by payment. commercial loan in the amount of P700,000 from respondent
Where the debtor introduces some evidence of payment, the Maasin Traders Lending Corporation. The loan was evidenced
burden of going forward with the evidence—as distinct from by a promissory note dated December 11, 1987 and secured
the general burden of proof—shifts to the creditor, who is then by a real estate mortgage over the Cincos land and 4-storey
under a duty of producing some evidence to show non- building in Maasin, Southern Leyte.
payment.
Under the terms of the PN, the P700K loan was subject to a
IN THE CASE: Nevertheless, it has been established that monthly interest rate of 3&% or 36% per annum, payable within
respondent obtained a car loan amounting to P648,288.00 from 6 months, renewable for another 6 months. As of July 1989, the
petitioner. Thus, the burden is now on respondent to prove that outstanding obligations amounted to P1,071,256 which
the obligation has already been extinguished by payment. included principal, interest and penalties.

Although not exclusive a receipt of payment is the best To be able to pay the loan in favor of MTLC, the spouses Go
evidence of the fact of payment. We held that the fact of Cinco applied for a loan with PNB and offered as collateral the
payment may be established not only by (1) documentary same properties they previously mortgaged to MTLC. The
evidence but aslo by (2) parol evidence. PNB approved the P1.3M loan, however the release of the
amount was conditioned on the cancellation of mortgage in
Except for respondent’s bare allegations that he has fully paid favor of MTLC.
the P648,288.00 car loan, there is nothing in the records
which shows that full payment has indeed been made. Manuel went to the house of respondent Ester Servacio, MTLC’s
Respondent did not present any receipt other than the President to inform her that there was money with the PNB for
certification dated September 10, 1996 which only proves that the payment of his loan with MTLC. Ester then proceeded to the
respondent has already paid P337,650.00 of the car loan. A PNB to verify the information, but the banks officers informed
balance of P310,638.00 remained. her that there was no pending loan with them. Manuel
assured her that there was money with the PNB and promised
Even respondent’s testimony lacks credence. He alleged that to execute a document that would allowed her to collect the
the amortization of the car loan was deducted from his salaries, proceeds from the PNB loan.
bonuses and commissions. However, he could not even answer
nor give an estimate of how much bonuses and commissions he Manuel executed an SPA authorizing Ester to collect the
receives from petitioner. proceeds of his PNB loan. Ester again went to the banks, this
time the banks confirmed the existence of the loan, but they
His pay slips do not reflect such deductions, because there required Ester to first sign a deed of release/cancellation of
is no such car loan field in the accounting program for the mortgage before they could release the proceeds to her.
payroll. He admitted that he only presumed. • Outraged that the spouses Go used the same
• He must have shown the difference if indeed there was properties mortgaged to MTLC as collateral for the
deductions, but here merely made calculation on what PNB loan, Ester refused to sign the did and did not
he presumed he already paid. collect the P1. 3M proceeds.
• He could have presented testimonies of other
persons. As the MTLC loan was already due, Ester instituted foreclosure
• In fact, the November 28, 1998 Letter showed that proceedings against the spouses Go Cinco on July 24, 1989.
the respondent was aware that he had outstanding The Spouses Go allege that the foreclosure of the mortgage
obligations with petitioner. was no longer proper as there had already been settlement of
Manuel’s obligation in favor of MTLC. They claimed that the
It was questionable on why would he agree on a setup without assignment of the proceeds of the PNB loan amount to the
any written acknowledgment of his payments or of his loan, he payment of the MTLC loan. And the Ester’s refusal were
should have insisted since he was the only employee give a unjustified and entitled them to the payment of damages.
car loan, it would be inconvenient for petitioner.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 88

Ester countered these allegations by claiming that she had not There is nothing legally objectionable in a mortgagor’s act
been informed that the spouses Go plan to obtain a loan of taking a second or subsequent mortgage on a property
from the PNB and to use such to settle the MTLC loan. She already mortgage. A subsequent mortgage is recognized as
claimed that she had no explicit agreement with Manuel valid by law and by commercial practice, subject to the prior
authorizing her to apply the proceeds of the PNB loan with the rights of previous mortgages.
MTLC, the SPA merely authorized her to collect. For it was
unfair for her to release the mortgage when no actual VOID ACTION: Under Article 2130, a stipulation forbidding the
payment has been made. owner from alienating the immovable mortgaged is considered
void. If the mortgagor-owner is allowed to convey the entirety
RTC. In favor of the spouse Go Cinco. found that the evidence of his interests in the mortgaged property, reason dictates that
sufficiently established the existence of the PNB loan whose the lesser right to encumber his property with other liens must
proceeds were available to satisfy Manuel’s obligation with also be recognized.
MTLC, and that Ester unjustifiably refused to collect the amount.
Creditors, it ruled, cannot unreasonably prevent payment or RULE: Ester, therefore, could not validly require the spouses Go
performance of obligation to the damage and prejudice of Cinco to first obtain her consent to the PNB loan and mortgage.
debtors who may stand liable for payment of higher interest Besides, with the payment of the MTLC loan using the proceeds
rates. of the PNB loan, the mortgage in favor of the MTLC would have
naturally been cancelled.
CA. Reversal of the RTC decision, the appellate court found that
there was no explicit agreement between Ester and the In addition, Manuel had already expressed intent to fully
spouses Go Cinco for the cancellation of the MTLC settle the MTLC loan and of paying through the PNB loan
mortgage in favor of PNB. he would secure, which he did. Thus the SPA cannot be
counted as simply to collect, but this is to collect the proceeds
Issues as payment of the obligation.
Whether or not the loan due the MTLC had been extinguished.
Unjust Refusal Cannot be Equated to Payment
Payment as Mode of Extinguishing Obligations While Esters refusal was unjustified and unreasonable, we
Obligations are extinguished by payment or performance. e. cannot agree with Manuel’s position that this refusal had the
Under Article 1232 of the Civil Code, payment means not only effect of payment that extinguished his obligation to MTLC.
the delivery of money but also the performance, in any other Article 1256 is clear and unequivocal.
manner, of an obligation. Article 1233 of the Civil Code states • A refusal without just cause is not equivalent to
that a debt shall not be understood to have been paid unless payment; to have the effect of payment and the
consequent extinguishment of the obligation to pay,
the thing or service in which the obligation consists has been
the law requires the companion acts of tender of
completely delivered or rendered.
payment and consignation.
In contracts of loan, the debtor is expected to deliver the sum
IN THE CASE: Asad twist in this case for Manuel was that he could
of money due the creditor. These provisions must be read in
relation with the other rules on payment under the Civil Code, not avail of consignation to extinguish his obligation to MTLC,
which rules impliedly require acceptance by the creditor of the as PNB would not release the proceeds of the loan unless and
payment to extinguish an obligation. until Ester had signed the deed of release/cancellation of
mortgage, which she unjustly refused to do. Hence, to compel
IN THE CASE:Manuel sought to pay Ester by authorizing her Ester to accept the loan proceeds and to prevent their
through an SPA, to collect the proceeds of the PNB loan an act mortgaged properties from being foreclosed, the spouses Go
that would have led to the payment if Ester had collected the Cinco found it necessary to institute the present case for
loan proceeds as authorized. specific performance and damages.

Admittedly, the delivery of the SPA was not, strictly speaking, a Effects of the Unjust Refusal
delivery of the sum of money due to MTLC, and Ester could not Even though there was no tender of payment coupled with
be compelled to accept it as payment. But she refused to sign consignation, the spouses Go Cinco duly established that
which would have extinguished obligations and allowed the they have legitimately secured a means of paying off their
cancellation of the mortgage. loan with MTLC; they were only prevented from doing so by
the unjust refusal of Ester to accept the proceeds of the PNB
Ester Had Unjust Refusal to Accept Payment loan through her refusal to execute the release of the
She refused to accept the payment because the bank required mortgage on the properties mortgaged to MTLC.
her to first sign a deed of release. She alleges that a prior • Since payment was available and was unjustifiably
mortgagee the spouses Cinco should have obtained her refused, justice and equity demand that the spouses
consent before offering the properties already mortgaged to Go Cinco be freed from the obligation to pay
her as security for the PNB loan. interest on the outstanding amount from the time
the unjust refusal took place
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 89

Under Article 19 of the Civil Code,


ARTICLE 19, CIVIL CODE APPLIED: On July 30, 2003, PNB sent letters to Anna Marie to inform her
they should likewise be entitled to damages, as the unjust that PNB refused to honor its obligation under the two
refusal was effectively an abusive act contrary to the duty to act FXCTDs and that they withheld the release of the balance.
with honesty and good faith in the exercise of rights and the According to the PNB, Anna Marie has pre-terminated,
fulfillment of duty. withdrew and or debited suns against her deposits. Thus,
promoted Anna Marie to filed before the RTC a complaint for
Esters act of refusing payment was motivated by bad faith as a sum of money and damages against PNB and Fernandez.
evidenced by the utter lack of substantial reasons to support it.
Her unjust refusal, in her behalf and for the MTLC which she Anna Marie’s Contention
represents, amounted to an abuse of rights; they acted in an As to the two FXCTDs, Anna Marie contended that the PNB’s
refusal to pay her time deposits is contrary to law. The PNB
oppressive manner and, thus, are liable for moral and
cannot claim that the bank deposits have been paid since the
exemplary damages.
certificates of the time deposits were still with her.
HELD: The petition is granted, CA decision reversed and
respondents are directed to accept the proceeds of the As to the consolidated savings account, Anna Marie stated that
spouses Go Cincos from PNB if still available, and to the PNB had already acknowledged the balance in the Deed of
consent to the release of the mortgage. Waiver and Quitclaim amounting to P2.734M. PNB presented
no concrete proof that the remaining balance of P250,741 had
been withdrawn.
GUMABON v. PNB (2016)
She prayed that the PNB and Fernandez be held solidarily liable
Facts: On August 12, 2004, Anna Marie filed a complaint for for actual, moral, and exemplary damages as well as fees and
recovery of sum of money and damages before theRTC against costs for PNB’s refusal to honor its obligations.
PNB and PNB Delta Branch Manager Silverio Fernandez. The
case stemmed from the PNB’s refusal to release Anna Marie’s PNB’s Answer
money in a consolidated savings account and in two foreign (1) Anna Marie is not entitled to the balance of the
exchange time deposits, evidenced by Foreign Exchange consolidated savings account based on solutio
Certificates of Time Deposit (FXCTD). indebiti.
It was shown that Anna withdrew a total of P251,246 from the
In 2001, Anna Marie together with her mother Angeles and her two of the eight savings accounts and used this amount to
siblings Anna Elena and Santiago (Gumabons) deposited with purchase manager’s check hence it should be deducted from
the PNB Delta Branch $10,945.28 and $16,830.91 for which they the Deed of Waiver and Quitclaim, offered evidence of
were issued two FXCTD. They also maintained eight saving photocopies of PNB’s miscellaneous ticket and manager’s
accounts in the same bank. Anna Marie decided to consolidate check as evidence to prove the withdrawals, also argued for
the sight savings accounts to withdraw P2.72M from the unjust enrichment.
consolidated savings account to help her sister’s finances.
(2) PNB already paid the amount covered by the first
Anna Marie called the PNB employee handling her account, FXCTD.
Salvoro to facilitate the consolidation of the savings account It wa shown that she is not entitled to received such amount for
and the withdrawal. When she went to the bank on April 14, she pre-terminated the FXCTD on 2002 and used such
2003, she was informed that she could not withdraw from the deposited together with another deposited (part of FXCTD 2)
savings accounts since her bank records were missing and to purchase a foreign demand draft payable to Anna
Salvoro could not be contacted. Rose/Angeles Gumabon. The PNB presented a facsimile copy
of Anna’s Rose SOA to prove such payment.
On April 15, 2003 she presented her two FXCTDs but was also
unable to withdraw against them. Fernandez informed her (3) PNB is only liable for the remaining $10,718 of the
that the bank would still verify and investigate before allowing second FXCTD rather than $17,235.41 (full amount)
the withdrawal since Salvoro had not reported for work. She (4) Anna Marie is guilty of contributory negligence.
sent two demands letters.
REPLY: Anna Marie argued that the best evidence of her
After a month, PNB finally consolidated the savings account withdrawals is the withdrawal slips duly sign by her and the
and issued a passbook, and confirmed the deposits which passbooks pertaining to the accounts. PNB failed to show
amounted to P2.734M. Anna Marie, her mother and PNB any of the withdrawal slips and failed to show sufficient
executed a Deed of Waiver and Quitclaim on May 23, 2003 to evidence of the used of accounts’ funds.
settle all questions regarding the consolidation of the savings
accounts. After withdrawals, balance is P250,741.82. RTC ruled in favor of Anna Marie. Mainly based on insufficient
evidence (photocopy, failure to present withdrawals, failed to
satisfy the best evidence rule).
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 90

CA reversed ruling noting the suspicious and excusive dealings depositors with meticulous care, always having in mind the
with Salvoro by making unauthorized and unrecorded fiduciary nature of the relationship. Every single transaction,
withdrawals no entries in the passbook. down to the last centavo and as promptly as possible.
Issue: Thus, the CA should not have admitted the subject document
Whether or not Anna Marie is entitled to the amounts of the even if the PNB tendered the excluded evidence. Notably, PNB
two FXCTDs and the remaining balance of the consolidated admitted in the Deed of Waiver and Quitclaim that it owed
savings account and damages? Anna Marie P2.73 and that after many transaction, the deposit
became P250,741. The inevitable conclusion is that PNB’s
Discussion: The Court grants the petition of Anna Marie and obligation to pay subsists.
reverses the CA ruling.
On Payment of the Amount Covered by FXCTD 993902
PNB Failed to Establish the Fact of Payment to Anna Marie PNB presented foreign demand draft which Anna Marie
on the Two FXCTDs and Consolidated Savings Account allegedly purchased with the funds of the first FXCTD. It also
presented Anna Rose’s SOA to show that there was a fund
One Who Alleges Payment has the Burden of Proving It transfer involving the contested amount. In addition, they also
The burden of proving that the debt had been discharged by presented the Affidavit of PNB New York’s Branch Officer
payment rests upon the debtor once the debt’s existence has about the fund transfer.
been fully established by the evidence on record. When the
debtor introduces some evidence of payment, the burden of Anna Rose’s SOA – inadmissible
going forward with the evidence, as distinct from the burden of Because it fails to qualify as relevant evidence. The SOA does
proof, shift to the creditor. Consequently, the creditor has a duty not show which of the amount stated therein came from the
to produce evidence of non-payment. FXCTD 993902.

IN THE CASE:Both the CA and RTC declared that PNB has the Affidavit of PNB New York’s Branch Officer – inadmissible
burden of proving the payment. However, they differed in It was not formally offered. Formal Offer means that the
resolving the sufficiency of evidence of payment to shift the offeror shall inform the court of the purpose of introducing its
burden of evidence to Anna Marie. exhibits into evidence. Without a formal offer, the courts cannot
• RTC found PNB failed to do so after excluding PNB’s take notice even if marked and identified.
evidence. • It was not formally offered to corroborate the SOA of
• CA considered the excluded evidence and found Anna Rosa. It remains inadmissible for being hearsay.
sufficient proof of payment. • An affidavit is merely hearsay evidence when its affiant
or maker did not take the witness stand.
On Payment of the Amount Covered by Consolidated SA • Fernandez was not the proper party to identify the
PNB alleges that it had already paid the P250,741. As it affidavit for he is not the affiant.
presented the manager’s check to prove that Anna Marie RULE: Thus, PNB failed to present sufficient and admissible
purchased the check using the amount covered by two savings evidence to prove payment of FXCTD 1 amounting to $10,058.
account which were later part of the consolidated SA. The PNB
also presented the miscellaneous ticket to prove Anna Marie’s On Payment of the Amount Covered by FXCTD 993992
withdrawal from savings account. PNB presented manager’s checks as well as miscellaneous
tickets which were held inadmissible. PNB cannot rely on the
Rules on Evidence, Admissibility miscellaneous tickets alone. These tickets were neither
Evidence to be admissible must comply with two qualifications posted at the back of the FXCTD, nor on her ledger to show
it has (a) relevance and (b) competence. Evidence is relevant if that several withdrawals had been made. There are no
it has a relation to the fact in issue as to induce belief in its irregularities in the certificates to justify the PNB’s refusal to pay
existence of non-existence. While competence if it is not the stated amounts in the certificated when it was presented
excluded by the law or the Rules of Court. for payment.

Competence is also determined by the best evidence rule. RULE: PNB is liable for Anna Marie’s claims since it failed to prove
Rule 130, Section 3 provides that the original copy of the that it had already been discharged from its obligation.
document must be presented whenever the content of the
document is under inquiry. PNB is Liable for Actual, Moral and Exemplary Damages as
well as Attorney’s Fes for its Negligent Acts as a Banking
IN THE CASE: The PNB cannot simply substitute the mere Institution
photocopies of the subject documents for the original copies
without showing the court that any of the exceptions under Rule PNB was negligent for its failure to update and properly handle
130, Section 3 applies. The failure of the PNB to give a justifiable Anna Marie’s accounts. This is patents from the letter that
reason for the absence of the original documents shows the admitting error and unauthorized withdrawals from her
PNB’s dismal failure to fulfill its fiduciary duty to Anna accounts. Furthermore, she was made to believe that she her
Marie. The Court expects the PNB to treat the account of its amounts remaining for they executed a Deed of Waiver and
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 91

Quitclaim. PNB still liable even if employee (Article 2180). was sent again eiterating its demand for payment under the
Salvoro’s disappearance further shows negligence of PNB’s aforementioned bond. Both letters allegedly went unheeded.
supervision of employees.
On Contributory Negligence Asahi filed a complaint against JDS and SICI sough from JDS
PNB failed to substantiate its allegation that she was guilty of payment of P3,256M representing additional expenses incurred
contributory negligence. She cannot be made liable for by Asahi for the completion of the project using another
entrusting her account with Salvoro, who was the bank’s time contractor and from JDS and SICI jointly and severally, payment
deposit specialist. She cannot be faulted if she engaged with of P750,000.00 as damages in accordance with the performance
her transaction to him. bond. Jose D. Santos, Jr. died the previous year (1990), and
tat JDS Construction was no longer at its address.
HELD: The petition is granted; the CA decision is reversed and
RTC decisions is reinstated with modifications. PNB is ordered On July 10, 1991, SICI filed its answer, alleging that the money
to pay Anna Marie Gumabon of the outstanding balances and claims have been extinguished by the death of Jose D. Santos, Jr.
damages and attorney’s fees and cost. Even if this were not the case, SICI had been released from its
liability under the performance bond because there was no
Effect of Death liquidation, with the active participation and/or involvement,
pursuant to procedural due process, of herein surety and
STRONGHOLD INSURANCE v. REPUBLIC-ASAHI (2006) contractor Jose D. Santos, Jr., hence, there was no ascertainment
of the corresponding liabilities of Santos and SICI under the
Facts: On May 24, 1989, Republic-Asahi Glass Corporation performance bond. Liquidation was impossible due to the
entered into a contract with Jose D. Santos, proprietor of the death of Santos.
JDS Construction, for the construction of roadways and a
drainage system in Republic-Asahi’s compound in Barrio RTC. Dismissed the complaint of respondent against JDS and
Pinagbuhatan, Pasig City, where [respondent] was to pay x x x SICI on the grounds that the claim against JDS did not survive
JDS five million three hundred thousand pesos (P5,300,000.00) the death of its sole proprietor, Jose D. Santos, Jr.
inclusive of value added tax for said construction, which was
supposed to be completed within a period of two hundred CA. SICI’s obligation under the surety agreement was not
forty (240) days beginning May 8, 1989. extinguished by the death of Jose D. Santos, Jr. Consequently,
Republic-Asahi could still go after SICI for the bond.
In order ‘to guarantee the faithful and satisfactory performance
of its undertakings’ JDS, shall post a performance bond of Issue
seven hundred ninety-five thousand pesos (P795,000.00). JDS Whether petitioner’s liability under the performance bond was
executed, jointly and severally with Stronghold Insurance automatically extinguished by the death of Santos, principal.
Co., Inc. (SICI) Performance Bond No. SICI-25849/g(13)9769.
Discussion: The petition has no merit. A surety company’s
On May 23, 1989, [respondent] paid JDS seven hundred ninety- liability under the performance bond it issues is solidary. The
five thousand pesos (P795,000.00) by way of downpayment. death of the principal obligor does not, as a rule, extinguish
Two progress billings were done. the obligation and the solidary nature of that liability.

Several times prior to November of 1989, Republic-Asahi’s Effect of Death on Surety’s Liability
engineers called the attention of JDS to the alleged As a general rule, the death of either the creditor or the debtor
alarmingly slow pace of the construction, which resulted in does not extinguish the obligation. Obligations are transmissible
the fear that the construction will not be finished within the to the heirs, except when the transmission is prevented by the
stipulated 240-day period. However, said reminders went law, the stipulations of the parties, or the nature of the
unheeded by JDS. obligation. Only obligations that are personal or are identified
with the persons themselves are extinguished by death.
November 24, 1989, dissatisfied with the progress of the • Section 5, Rule 86, expressly allows prosecution of
work undertaken by JDS, Republic-Asahi extrajudicially money claims arising from a contract against the
rescinded the contract pursuant to Article XIII of said contract, estate of a deceased debtor.
and wrote a letter to JDS informing the latter of such rescission.
Such rescission, according to Article XV of the contract shall IN THIS CASE: Whatever monetary liabilities or obligations Santos
not be construed as a waiver of [respondent’s] right to had under his contracts with respondent were not
recover damages from JDS and the latter’s sureties. intransmissible by their nature, by stipulation, or by provision
of law. Hence, his death did not result in the extinguishment of
JDS’s failure to comply with the provisions of the contract, those obligations or liabilities, which merely passed on to his
which resulted in the said contract’s rescission, it had to hire estate.
another contractor to finish the project, for which it incurred an
additional expense of P3.256M. Asahi sent a letter of SICI, filing Death is not a defense that he or his estate can set up to wipe
its claim under the bond for not less than P795,000 a letter out the obligations under the performance bond.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 92

Consequently, petitioner as surety cannot use his death to same to him. Article 1233, debt has not been paid unless the
escape its monetary obligation under its performance bond. things or service is delivered or rendered as the case may be.

As a surety, petitioner is solidarily liable with Santos in The Burden of Proof of Such Payment Lies with the Debtor
accordance with the Civil Code. Under the law and In the instant case, neither the SPA nor the check issued by
jurisprudence, respondent may sue, separately or together, the petitioner was ever presented in court.
principal debtor and the petitioner herein, in view of the
solidary nature of their liability. The testimonies of petitioner’s own witnesses regarding the
check were conflicting. Tagamolila testified that the check was
The death of the principal debtor will not work to convert, issued to the order of Sonia Gonzaga as attorney-in-fact of
decrease or nullify the substantive right of the solidary creditor. Loreto Tan, while Elvira Tibor, assistant cashier of PNB (Bacolod
Evidently, despite the death of the principal debtor, Branch), stated that the check was issued to the order of Loreto
respondent may still sue petitioner alone, in accordance with Tan.
the solidary nature of the latter’s liability under the
performance bond. Furthermore, contrary to petitioner’s contention that all that is
needed to be proved is the existence of the SPA, it is also
1240. – To Whom Payment Shall be Made necessary for evidence to be presented regarding the nature
and extent of the alleged powers and authority granted to
PNB v. COURT OF APPEALS (1996) Sonia Gonzaga; more specifically, to determine whether the
document indeed authorized her to receive payment intended
Facts: Private respondent Loreto Tan (Tan) is the owner of a for private respondent. However, no such evidence was ever
parcel of land abutting the national highway in Mandalagan, presented.
Bacolod City. Expropriation proceedings were instituted by the
government against private respondent Tan and other property Considering that the contents of the SPA is in issue, the best
owners before CFI Negros. evidence rule applies. Hence, only the original document
(which has not been presented at all) is the best evidence of the
Tan filed a motion dated May 10, 1978, requesting issuance of fact as to whether or not private respondent indeed authorized
an order for the release to him of expropriation price of Sonia Gonzaga to receive the check from petitioner. In the
P32,458. PNB Bacolod was required by the trial court to release absence of such document, petitioner’s arguments
to him the amount of P32,480 deposited with it by the regarding due payment must fail.
government. PNB through its Asst. Manager Juan Tagamolila,
issued a manager’s check worth P32,480 and delivered the HELD: In the case at bench, while there is a clear breach of
same to one Sonia Gonzaga without Tan’s knowledge, petitioner’s obligation to pay private respondents, there is no
consent or authority. She deposited it in her account with evidence that it acted in a fraudulent, wanton, reckless or
FEBTC and withdrew the said amount. oppressive manner.

Private respondent Tan subsequently demanded payment in CULABA v. COURT OF APPEALS (2004)
the amount of P32,480.00 from petitioner, but the same was
refused on the ground that petitioner had already paid and Facts: Spouses Francisco and Demetria Culaba were the owners
delivered the amount to Sonia Gonzaga on the strength of a and proprietors of the Culaba Store and were engaged in the
Special Power of Attorney (SPA) allegedly executed in her sale and distribution of SMC beer products.
favor by Tan.
• Third party complaint was dismissed due to failure of SMC sold beer products on credit to the Culaba spouses in the
petitioner to have the summons serve to Sonia and amount of P28,650.00, as evidenced by Temporary Credit
Nilo Gonzaga. Invoice No. 42943. Thereafter, the Culaba spouses made a
partial payment of P3,740.00, leaving an unpaid balance of
RTC ordered ordering petitioner and Tagamolila to pay private P24,910.00. As they failed to pay despite repeated demands,
respondent jointly and severally the amount of P32,480.00 with SMC filed an action for collection of a sum of money against
legal interest, damages and attorney’s fees. CA affirmed. them before the RTC of Makati, Branch 138.

Issue: The defendant-spouses denied any liability, claiming that they


Whether or not SPA ever existed. had already paid the plaintiff in full on four separate
occasions. To substantiate this claim, the defendants presented
Discussion: The court finds the petition unmeritorious. four (4) Temporary Charge Sales (TCS) Liquidation Receipts.

There is no question that no payment had ever been made to Defendant Francisco Culaba testified that he made the
private respondent as the check was never delivered to him. foregoing payments to an SMC supervisor who came in an SMC
When the court ordered petitioner to pay private respondent van. He was then showed a list of customers’ accountabilities
the amount of P32,480.00, it had the obligation to deliver the which included his account. The defendant, in good faith, then
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 93

paid to the said supervisor, and he was, in turn, issued genuine RULE: We find no reason to reverse the said findings.
SMC liquidation receipts. SMC affidavit of notice of loss of the
entire booklet of TCSL receipts including such. Payment to the Proper Party
RTC the trial court rendered judgment in favor of SMC, and Article 1240 of the Civil Code provides that payment shall be
held the Culaba spouses liable on the balance of its obligation. made to the person in whose favor the obligation has been
the trial court rendered judgment in favor of SMC, and held the constituted, or his successor-in-interest, or any person
Culaba spouses liable on the balance of its obligation showing authorized to receive it.
that they were spurious.
IN THE CASE:In this case, the payments were purportedly made
CA affirmed the decision of the trial court, according to to a "supervisor" of the private respondent, who was clad in an
appellant Francisco, he could not be faulted for paying the SMC SMC uniform and drove an SMC van. He appeared to be
collector who came in a van and was in uniform, and that any authorized to accept payments as he showed a list of customers’
regular customer would, without any apprehension, transact accountabilities and even issued SMC liquidation receipts
with such an SMC employee. Furthermore, the respective which looked genuine.
receipts issued to him at the time he paid on the four occasions
mentioned had not yet then been declared lost. Unfortunately for petitioner Francisco Culaba, he did not
• Thus, the subsequent publication in a daily newspaper ascertain the identity and authority of the said supervisor, nor did
declaring the booklets lost did not affect the validity he ask to be shown any identification to prove that the latter was,
and legality of the payments made. indeed, an SMC supervisor. The petitioners relied solely on the
man’s representation that he was collecting payments for
It was incumbent upon the defendants-appellants to exercise SMC. Thus, the payments the petitioners claimed they made
ordinary prudence and reasonable diligence to verify and were not the payments that discharged their obligation to the
identify the extent of the alleged agent’s authority. It was private respondent.
their burden to establish the true identity of the assumed agent,
and this could not be established by mere representation, The Basis of Agency is Representation
rumor or general reputation. As they utterly failed in this regard, A person dealing with an agent is put upon inquiry and must
the appellants must suffer the consequences. discover upon his peril the authority of the agent.

Issue IN THE CASE: The petitioners’ loss could have been avoided if they
Whether or not the respondent timely notified petitioner of the had simply exercised due diligence in ascertaining the identity
lost booklet of receipts and that petitioner was remiss in the of the person to whom they allegedly made the payments. The
payment of his accounts to its agent. fact that they were parting with valuable consideration should
have made them more circumspect in handling their business
Discussion. The petition is dismissed. The petitioners question transactions.
the findings of the Court of Appeals as to whether the payment
of the petitioners’ obligation to the private respondent was Persons dealing with an assumed agent are bound at their peril
properly made, thus, extinguishing the same. This is clearly a to ascertain not only the fact of agency but also the nature
factual issue, and beyond the purview of the Court to delve into. and extent of authority, and in case either is controverted, the
burden of proof is upon them to establish it.
Review of the Facts:
First. Receipts Nos. 27331, 27318, 27339 and 27346 were The petitioners in this case failed to discharge this burden,
included in the private respondent’s lost booklet, which considering that the private respondent vehemently denied
loss was duly advertised in a newspaper of general that the payments were accepted by it and were made to its
circulation; thus, the private respondent could not have officially authorized representative.
issued them to the petitioners to cover the alleged payments on
the dates appearing thereon. In the case at bar, the most prudent thing the petitioners should
have done was to ascertain the identity and authority of the
Second. There was something amiss in the way the receipts person who collected their payments. Failing this, the
were issued to the petitioners, as one receipt bearing a higher petitioners cannot claim that they acted in good faith when
serial number was issued ahead of another receipt bearing a they made such payments.
lower serial number, supposedly covering a later payment. The
petitioners failed to explain the apparent mix-up in these Their claim therefor is negated by their negligence, and they
receipts, and no attempt was made in this regard. are bound by its consequences. Being negligent in this regard,
the petitioners cannot seek relief on the basis of a supposed
Third. The fact that the salesman’s name was invariably left agency.
blank in the four receipts and that the petitioners could not
even remember the name of the supposed impostor who HELD: WHEREFORE, the instant petition is hereby DENIED. The
received the said payments strongly argue against the veracity of assailed Decision dated April 16, 1996, and the Resolution
the petitioners’ claim.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 94

dated July 19, 1996 of the Court of Appeals are AFFIRMED.


Costs against the petitioners. On December 9, 1983, Lim Sio Wan deposited with Allied a
second money market placement to mature on January 9, 1984.

ALLIED BANKING CORP. v. LIM SIO WAN (2008) On December 14, 1983, upon the maturity date of the first
money market placement, Lim Sio Wan went to Allied to
Facts: On November 14, 1983, respondent Lim Sio Wan withdraw it. She was then informed that the placement had
deposited with petitioner Allied Banking Corporation (Allied) at been pre-terminated upon her instructions. She denied giving
its Quintin Paredes Branch in Manila a money market any instructions and receiving the proceeds thereof. She
placement of P 1,152,597.35 for a term of 31 days to mature on desisted from further complaints when she was assured by the
December 15, 1983, as evidenced by Provisional Receipt No. bank’s manager that her money would be recovered.
1356 dated November 14, 1983.
On January 24, 1984, Lim Sio Wan, realizing that the promise
On December 5, 1983, a person claiming to be Lim Sio Wan that her money would be recovered would not materialize, sent
called up Cristina So, an officer of Allied, and instructed the a demand letter to Allied asking for the payment of the first
latter to pre-terminate Lim Sio Wan’s money market placement, placement. Allied refused to pay Lim Sio Wan, claiming that
to issue a manager’s check representing the proceeds of the the latter had authorized the pre-termination of the
placement, and to give the check to one Deborah Dee Santos placement and its subsequent release to Santos.
who would pick up the check. Lim Sio Wan described the RTC ordered Allied Bank to pay plaintiff P1,158,648, moral,
appearance of Santos so that So could easily identify her.
attorney’s fees and costs of suit.

Santos arrived at the bank and signed the application form for CA modified decision. Allied Banking to pay 60% and
a manager’s check to be issued. The bank issued Manager’s Metrobank for P40% of the amount so as to the moral, AF and
Check No. 035669 for P1,158,648.49, representing the proceeds costs of suit.
of Lim Sio Wan’s money market placement in the name of Lim
Sio Wan, as payee. The check was cross-checked "For Payee’s Issues:
Account Only" and given to Santos. Whether or not CA erred in holding the Lim Sio Wan did not
authorize to pre-terminate initial placement and to deliver the
Thereafter, the manager’s check was deposited in the check to Deborah Santos.
account of Filipinas Cement Corporation (FCC) at
respondent Metropolitan Bank and Trust Co. (Metrobank), Question of Fact
with the forged signature of Lim Sio Wan as indorser. Allied questions the finding of both the trial and appellate
courts that Allied was not authorized to release the proceeds of
Earlier, on September 21, 1983, FCC had deposited a money Lim Sio Wan’s money market placement to Santos. Allied clearly
market placement for PhP 2 million with respondent Producers raises a question of fact. When the CA affirms the findings of
Bank. Santos was the money market trader assigned to handle fact of the RTC, the factual findings of both courts are binding
FCC’s account. Such deposit is evidenced by Official Receipt No. on this Court.
31756813 and a Letter dated September 21, 1983 of Santos
addressed to Angie Lazo of FCC, acknowledging receipt of the Liability of the Parties
placement. As to the liability of the parties, we find that Allied is liable to
Lim Sio Wan. Fundamental and familiar is the doctrine that the
The placement matured on October 25, 1983 and was rolled- relationship between a bank and a client is one of debtor-
over until December 5, 1983 as evidenced by a Letter dated creditor. Bank deposits is in the nature of a simple loan.
October 25, 1983. When the placement matured, FCC
demanded the payment of the proceeds of the placement. Money Market, Defined
On December 5, 1983, the same date that So received the [A] money market is a market dealing in standardized short-
phone call instructing her to pre-terminate Lim Sio Wan’s term credit instruments (involving large amounts) where
placement, the manager’s check in the name of Lim Sio lenders and borrowers do not deal directly with each other but
Wan was deposited in the account of FCC, purportedly through a middle man or dealer in open market. In a money
representing the proceeds of FCC’s money market placement market transaction, the investor is a lender who loans his money
with Producers Bank. In other words, the Allied check was to a borrower through a middleman or dealer.
deposited with Metrobank in the account of FCC as Producers
Bank’s payment of its obligation to FCC. IN THE CASE: The money market was in the nature of a loan. Lim
Sio Wan, as creditor of the bank for her money market
The check was sent to Allied through the PCHC. Upon the placement, is entitled to payment upon her request, or upon
presentment of the check, Allied funded the check even maturity of the placement, or until the bank is released from its
without checking the authenticity of Lim Sio Wan’s obligation as debtor. Until any such event, the obligation of
purported indorsement. Thus, the amount on the face of the Allied to Lim Sio Wan remains unextinguished.
check was credited to the account of FCC.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 95

Lim Sio Wan did not authorize the release of her money market The liability of Allied, however, is concurrent with that of
placement to Santos and the bank had been negligent in so Metrobank as the last indorser of the check. When
doing, there is no question that the obligation of Allied to pay Metrobank indorsed the check in compliance with the PCHC
Lim Sio Wan had not been extinguished. Rules and Regulations without verifying the authenticity of Lim
Payment Made to a Wrong Party Sio Wan’s indorsement and when it accepted the check despite
Payment made by the debtor to a wrong party does not the fact that it was cross-checked payable to payee’s account
extinguish the obligation as to the creditor, if there is no fault only, its negligent and cavalier indorsement contributed to the
or negligence which can be imputed to the latter. easier release of Lim Sio Wan’s money and perpetuation of
the fraud. Given the relative participation of Allied and
Even when the debtor acted in utmost good faith and by Metrobank to the instant case, both banks cannot be adjudged
mistake as to the person of his creditor, or through error as equally liable. Hence, the 60:40 ratio of the liabilities of Allied
induced by the fraud of a third person, the payment to one who and Metrobank, as ruled by the CA, must be upheld.
is not in fact his creditor, or authorized to receive such payment,
is void, except as provided in Article 1241. Such payment does Lim Sio Wan’s money market placement in Allied Bank was pre-
not prejudice the creditor, and accrual of interest is not terminated and withdrawn without her consent. Moreover, the
suspended by it. proceeds of the placement were deposited in Producers
Bank’s account in Metrobank without any justification.
IN THE CASE: Since there was no effective payment of Lim Sio
Wan’s money market placement, the bank still has an obligation In other words, there is no reason that the proceeds of Lim Sio
to pay her at six percent (6%) interest from March 16, 1984 until Wans’ placement should be deposited in FCC’s account
the payment thereof. purportedly as payment for FCC’s money market placement
and interest in Producers Bank.
On Liability of Allied
Allied claims that Metrobank is the proximate cause of the loss With such payment, Producers Bank’s indebtedness to FCC was
of Lim Sio Wan’s money. It points out that Metrobank extinguished, thereby benefitting the former. Clearly, Producers
guaranteed all prior indorsements inscribed on the manager’s Bank was unjustly enriched at the expense of Lim Sio Wan.
check, and without Metrobank’s guarantee, the present Based on the facts and circumstances of the case, Producers
controversy would never have occurred. Bank should reimburse Allied and Metrobank for the amounts
the two latter banks are ordered to pay Lim Sio Wan.
Proximate cause is "that cause, which, in natural and continuous
sequence, unbroken by any efficient intervening cause, HELD: Clearly, Producers Bank must be held liable to Allied and
produces the injury and without which the result would not Metrobank for the amount of the check plus 12% interest per
have occurred." Thus, there is an efficient supervening event if annum, moral damages, attorney’s fees, and costs of suit which
the event breaks the sequence leading from the cause to the Allied and Metrobank are adjudged to pay Lim Sio Wan based
ultimate result. To determine the proximate cause of a on a proportion of 60:40.
controversy, the question that needs to be asked is: If the event
did not happen, would the injury have resulted? If the DELA CRUZ v. CONCEPCION (2012)
answer is NO, then the event is the proximate cause.
On March 25, 1996, petitioners (as vendors) entered into a
IN THE CASE:Allied avers that even if it had not issued the check Contract to Sell with respondent (as vendee) involving a house
payment, the money represented by the check would still be and lot in Cypress St., Phase I, Town and Country Executive
lost because of Metrobank’s negligence in indorsing the check Village, Antipolo City for a consideration of P2,000,000.00
without verifying the genuineness of the indorsement thereon. subject to the following terms and conditions:
a. An earnest money of P100,000 shall be paid immediately
The trial court correctly found Allied negligent in issuing the b. That a full DP of P400K on 02-29-96
manager’s check and in transmitting it to Santos without c. That P500K shall be paid before 05-05-96
d. Balance of P1M shall be paid on installment with interest of
even a written authorization. In fact, Allied did not even ask
18% per annum.
for the certificate evidencing the money market placement or call
e. Monthly amortization is P50,000 principal and interest
up Lim Sio Wan at her residence or office to confirm her included, must be paid to the vendors without need of prior
instructions. Both actions could have prevented the whole demand and every month after. Failure to pay a penalty of
fraudulent transaction from unfolding. Allied’s negligence must 5% of the amount due until account is updated.
be considered as the proximate cause of the resulting loss. f. After receipt of full payment, the Vendors hall execute the
Necessary Absolute Deed of Sale covering the house and lot
To reiterate, had Allied exercised the diligence due from a mentioned above.
financial institution, the check would not have been issued
and no loss of funds would have resulted. In fact, there would Before respondent issued the P500,000.00 replacement check,
have been no issuance of indorsement had there been no check she told petitioners that based on the computation of her
in the first place. accountant as of July 6, 1997, her unpaid obligation which
includes interests and penalties was only P200,000.00.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 96

Petitioners agreed with respondent and said “if P200,000.00 is Petitioners also manifested their conformity to the statement of
the correct balance, it is okay with us.” The title of the property account prepared by respondent. With factual antecedents,
was transferred to the respondent, and reminded to pay petitioners cannot be permitted to assert a different
P209,000 within three months. computation of the correct amount of respondent’s liability.
Despite repeated demands, petitioners failed to collect the
amounts they claimed from respondent. Hence, the Complaint Effect of Failure of Respondent to
for Sum of Money with Damages was filed with RTC Antipolo. Plead Payment of Obligation; Non-Objection
Nowhere in her Answer did she allege the defense of payment.
Answer: Respondent claimed that her unpaid obligation to However, during the presentation of her evidence, respondent
petitioners is only P200,000.00 as earlier confirmed by submitted a receipt to prove that she had already paid the
petitioners and not P487,384.15 as later alleged in the remaining balance.
complaint. Respondent thus prayed for the dismissal of the
complaint. By way of counterclaim, respondent prayed for the Both the RTC and the CA concluded that respondent had
payment of moral damages and attorney’s fees. already paid the remaining balance of P200,000.00. Petitioners
assail this as they should have maintained the judicial
During the presentation of the parties’ evidence, in addition to admission of respondent in her answer recognizing her
documents showing the statement of her paid obligations, balance of P200K.
respondent presented a receipt purportedly indicating payment
of the remaining balance of P200,000.00 to Adoracion Losloso Thus, while respondent judicially admitted in her Answer that
(Losloso) who allegedly received the same on behalf of she only paid P2 million and that she still owed petitioners
petitioners. P200,000.00, respondent claimed later and, in fact,
submitted an evidence to show that she already paid the
RTC. In favor of the respondent Concepcion. RTC noted that whole amount of her unpaid obligation. It is noteworthy
the evidence formally offered by petitioners have not actually that when respondent presented the evidence of payment,
been marked as none of the markings were recorded. Thus, it petitioners did not object thereto.
found no basis to grant their claims, especially since the amount
claimed in the complaint is different from that testified to. The When the receipt was formally offered as evidence, petitioners
court, on the other hand, granted respondent’s counterclaim. did not manifest their objection to the admissibility of said
document on the ground that payment was not an issue.
CA affirmed. This amount, however, had already been paid by Apparently, petitioners only denied receipt of said payment and
respondent and received by petitioners’ representative. assailed the authority of Losloso to receive payment.

Issue: Since there was an implied consent on the part of petitioners


Whether or not defendant full paid the claims of plaintiffs based to try the issue of payment, even if no motion was filed and no
on the alleged receipt of the payment by Adoracion Losloso amendment of the pleading has been ordered, the RTC cannot
from Ana Marie Concepcion. be faulted for admitting respondent’s testimonial and
Discussion: The petition is without merit. Petitioners also documentary evidence to prove payment.
claim that the RTC and the CA erred in giving credence to the
receipt presented by respondent to show that her unpaid Payment Must be Made to the Proper Party
obligation had already been paid having been allegedly given Admittedly, payment of the remaining balance of P200,000.00
to a person who was not armed with authority to receive was not made to the creditors themselves. Rather, it was
payment. allegedly made to a certain Losloso. Respondent claims that
Losloso was the authorized agent of petitioners, but the latter
APPLICATION OF CONTRACT: It is undisputed that the parties dispute it.
entered into a contract to sell a house and lot for a total
consideration of P2 million. Considering that the property was Losloso’s authority to receive payment was embodied in
payable in installment, they likewise agreed on the payment of petitioners’ letter addressed to respondent, dated August 7,
interest as well as penalty in case of default. 1997, where they informed respondent of the amounts they
advanced for the payment of the 1997 real estate taxes.
It is likewise settled that respondent was able to pay the total
purchase price of P2 million ahead of the agreed term. After In said letter, petitioners reminded respondent of her remaining
which, they agreed on the remaining balance by way of balance, together with the amount of taxes paid. Taking into
interest and penalties which is P200,000.00. Considering consideration the busy schedule of respondent, petitioners
that the term of payment was not strictly followed, and the advised the latter to leave the payment to a certain “Dori”
purchase price had already been fully paid by respondent, the who admittedly is Losloso, or to her trusted helper. This is
latter presented to petitioners her computation of her liabilities an express authority given to Losloso to receive payment.
for interests and penalties which was agreed to by petitioners.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 97

RULE:Thus, as shown in the receipt signed by petitioners’ agent The Ibrahims and Maruhoms asseverate that they are the real
and pursuant to the authority granted by petitioners to Losloso, owners of the lands; they being the lawful heirs of the late Datu
payment made to the latter is payment to petitioners. Magayo-ong Maruhom, who was the original proprietor.

HELD: The petition is denied and for lack of merit. The Court of They also claimed that Mangondato actually holds no claim or
Appeals decision is affirmed. right over the lands covered by TCT No. 378-A except that of a
trustee who merely holds the said lands in trust for them.
1242. Payment Made in Good Faith in Possession of Credit RTC Marawi granted the prayer for the issuance of the TRO as
well as the writ of preliminary injunction for the payments. Trial
NAT’L POWER CORPORATION v. IBRAHIM (2015) then ensued/

Facts: In 1978, petitioner took possession of a 21,995 sq.m. G.R. No. 113194 was decided on allowing payment of the
parcel of land in Marawi City, for the purpose of building just compensation. Mangondato filed a motion for execution of
thereon a hydroelectric power plant pursuant Agus 1 project. the decision in Civil Case No. 605-92 and Civil Case No. 610-
92.24 Against this motion, however, petitioner filed an
The subject land, while in truth a portion of a private estate opposition. Petitioner, in sum, posits that such writ of
registered under TCT No. 378-A4 in the name of herein preliminary injunction constitutes a legal impediment that
respondent Macapanton K. Mangondato (Mangondato), was effectively bars any meaningful execution of the decision in Civil
occupied by petitioner under the mistaken belief that such land Case No. 605-92 and Civil Case No. 610-92.
is part of the vast tract of public land reserved for its use by the • However, RTC Marawi found no merit in such
government under Proclamation No. 1354. opposition and rendered the issuance of writ of
execution for the amount of P21,801,951. A notice of
Mangondato first discovered petitioner’s occupation of the garnishment was served upon PNB.
subject land in 1979—the year that petitioner started its
construction of the Agus 1 plant. Shortly after such discovery, Decision in the Ownership Case
Mangondato began demanding compensation for the subject RTC Marawi decided that:
land from petitioner. • The Ibrahims and Maruhoms—not Mangondato—are
the true owners of the lands covered by TCT No. 378-
In support of his demand for compensation, Mangondato sent A, which includes the subject land.
to petitioner a letter dated 28 September 1981 wherein the • The subject land, however, could no longer be
former detailed the origins of his ownership over the lands reconveyed to the Ibrahims and Maruhoms since the
covered by TCT No. 378-A, including the subject land. same was already expropriated and paid for by the
petitioner under Civil Case No. 605-92 and Civil Case
But, after more than a decade, petitioner finally acquiesced to No. 610-92.
the fact that the subject land is private land covered by TCT No. • Be that as it may, the Ibrahims and Maruhoms, as true
378-A and consequently acknowledged Mangondato’s right, as owners of the subject land, are the rightful recipients of
registered owner, to receive compensation therefor. whatever rental fees and indemnity that may be due for
the subject land as a result of its expropriation.
Ultimately, however, the communications failed to yield a
genuine consensus between petitioner and Mangondato as to the Mangondato and the petitioner were found to be solidarily
fair market value of the subject land. liable to the Ibrahims and Maruhoms for the rental fees and
expropriation indemnity as well as attorney’s fees. Garnishment
Civil Cases of Magondato’s money in the possession of SSS of P2.7M and
Mangondato filed a complaint for reconveyance against was decided to be deducted from the amount payable in the
petitioner before the RTC of Marawi City in July 1992. In his ownership case.
complaint, Mangondato asked for, among others, the recovery
of the subject land and the payment by petitioner of a monthly Issue:
rental from 1978 until the return of such land. And an Whether or not the court was correct to hold petitioner liable in
expropriation proceeding. favor of the Ibrahims and Maruhoms for the rental fees and
expropriation indemnity.
RTC Marawi upheld petitioner’s right to expropriate the subject
land: it denied Mangondato’s claim for reconveyance and Discussion: The two tribunals postulated that, notwithstanding
decreed the subject land condemned in favor of the petitioner, petitioner’s previous payment to Mangondato of the rental fees
effective July of 1992, subject to payment by the latter of just and expropriation indemnity as a consequence of the execution
compensation in the amount of P21,995,000.00. of the decision in Civil Case No. 605-92 and 610-92, petitioner
may still be held liable to the Ibrahims and Maruhoms for such
Respondents Ibrahim and Maruhoms fees and indemnity because its previous payment to
Ibrahims and Maruhoms disputed Mangondato’s ownership of Mangondato was tainted with “bad faith.”
the lands covered by TCT No. 378-A, including the subject land.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 98

• Petitioner “allowed” payment to Mangondato despite


its prior knowledge, which dates back as early as 28 Since petitioner was only acting under the lawful orders of
September 1981, by virtue of Mangondato’s letter of a court in paying Mangondato, we find that no bad faith can
even date, that the subject land was owned by a be taken against it, even assuming that petitioner may have had
certain Datu Magayo-ong Maruhom and not by prior knowledge about the claims of the Ibrahims and
Mangondato; and Maruhoms upon the subject land and the TRO issued in Civil
• Allowed payment despite issuance of a TRO and a writ Case No. 967-93.
of preliminary injunction.
Petitioner argue however that, submits that a finding of bad Petitioner Cannot be Held Liable to the
faith against it would have no basis in fact and law, given that Ibrahims and Maruhoms
it merely complied with the final and executory decision in Civil
Case No. 605-92 and Civil Case No. 610-92 when it paid the Without the existence of bad faith, the ruling of the RTC and of
rental fees and expropriation indemnity due the subject to the Court of Appeals apropos petitioner’s remaining liability to
Mangondato. the Ibrahims and Maruhoms becomes devoid of legal basis.
• Petitioner thus insists that it should be absolved from
any liability to pay the rental fees and expropriation Two scenarios can happen:
indemnity to the Ibrahims and Maruhoms and prays If Mangondato was the real owner, then the obligation by
for the dismissal of Civil Case No. 967-93 against it. petitioner to pay for the rental fees and expropriation
indemnity due the subject land is already deemed extinguished
The court agrees with the petitioner grants the appeal. by the latter’s previous payment under the final judgment in
Civil Case No. 605-92 and Civil Case No. 610-92.
No Bad Faith on the Part of Petitioner
Petitioner is correct. No “bad faith” may be taken against it in If Ibrahims and Maruhoms, petitioner’s previous payment to
paying Mangondato the rental fees and expropriation Mangondato pursuant to Civil Case No. 605-92 and Civil Case
indemnity due the subject land. No. 610-92—given the absence of bad faith on petitioner’s part
as previously discussed—may nonetheless be considered as akin
Verily, the clear denominator in all of the foregoing judicial to a payment made in “good faith” to a person in
pronouncements is that the essence of bad faith consists in the “possession of credit” per Article 1242 of the Civil Code that,
deliberate commission of a wrong. just the same, extinguishes its obligation to pay for the rental
fees and expropriation indemnity due for the subject land.
Indeed, the concept has often been equated with malicious or
fraudulent motives, yet distinguished from the mere Application of Article 1242 on Good Faith
unintentional wrongs resulting from mere simple negligence or Article 1242 of the Civil Code is an exception to the rule that a
oversight. valid payment of an obligation can only be made to the person
to whom such obligation is rightfully owed.
ELEMENTS OF BAD FAITH
1. That the actor knew or should have known that a It contemplates a situation where a debtor pays a “possessor
particular course of action is wrong or illegal. of credit” i.e., someone who is not the real creditor but appears,
2. Despite such actual or imputable knowledge, the under the circumstances, to be the real creditor. In such
actor, voluntarily, consciously and out of his own free scenario, the law considers the payment to the “possessor of
will, proceeds with such course of action. credit” as valid even as against the real creditor considering the
good faith of the debtor.
IN THE CASE: That petitioner’s payment to Mangondato of the
rental fees and expropriation indemnity adjudged due for the IN THE CASE: We find that Mangondato—being the judgment
subject land in Civil Case No. 605-92 and Civil Case No. 610-92, creditor in Civil Case No. 605-92 and Civil Case No. 610-92 as
was required by the final and executory decision in the said well as the registered owner of the subject land at the time —
two cases and was compelled thru a writ of garnishment may be considered as a “possessor of credit” with respect to
issued by the court that rendered such decision. the rental fees and expropriation indemnity adjudged due for the
subject land in the two cases, if the Ibrahims and Maruhoms turn
In other words, the payment to Mangondato was not a product out to be the real owners of the subject land.
of a deliberate choice on the part of the petitioner but was
made only in compliance to the lawful orders of a court with Hence, petitioner’s payment to Mangondato of the fees and
jurisdiction. indemnity due for the subject land as a consequence of the
execution of Civil Case No. 605-92 and Civil Case No. 610-92
The more accurate rumination would be that it was the trial could still validly extinguish its obligation to pay for the same
court in Civil Case No. 605-92 and Civil Case No. 610-92 that even as against the Ibrahims and Maruhoms.
ordered or allowed the payment to Mangondato and that
petitioner merely complied with the order or allowance by the Effect of Extinguishment of Petitioner’s Obligation
trial court.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 99

(1) If Mangondato turns out to be the real owner, and wheel loader which are covered under the second deed
Ibrahims and Maruhoms would not be entitled to of chattel mortgage.
recover anything from anyone for the subject land.
SSS garnishment would be returned. Petitioners sought to dismiss the amended complaint. They
(2) they may only recover the rental fees and alleged that their previous payments on loan amortizations,
expropriation indemnity due the subject land the execution of the deed of assignment on August 16, 2000,
against Mangondato but only up to whatever and respondent’s acceptance of the three units of heavy
payments the latter had previously received from
equipment, had the effect of full payment or satisfaction of
petitioner pursuant to Civil Case No. 605-92 and
Civil Case No. 610-92. their total outstanding obligation which is a bar on respondent
1245. Dation in Payment bank from recovering any more amounts from them.
RTC. Dismissed for lack of merit, held that the deed of
ESTANISLAO v. EAST WEST BANKING (2008) assignment and the petitioner’s delivery of the heavy
equipment effectively extinguished petitioners total loan
Facts: On July 24, 1997, petitioners obtained a loan from the obligation. It also held that respondent was estopped from
respondent in the amount of P3,925,000.00 evidenced by a further collecting from the petitioners when it accepted,
promissory note and secured by two deeds of chattel without any protest, delivery of the three units of heavy
mortgage dated July 10, 1997: one covering two dump trucks equipment as full and complete satisfaction of the petitioner’s
and a bulldozer to secure the loan amount of P2,375,000.00, and total loan obligation. Respondent likewise failed to timely
another covering bulldozer and a wheel loader to secure the loan rectify its alleged mistake in the original complaint and deed of
amount of P1,550,000.00. Petitioners defaulted in the assignment, taking almost a year to act.
amortizations and the entire obligation became due and
demandable. CA reversed the RTC ruling. It hinges on the following reason:
1. Not binding for it was not signed by respondent.
On April 10, 2000, respondent bank filed a suit for replevin with 2. Respondent was not estopped by its own declaration
damages, praying that the equipment covered by the first deed because they were innocent mistake and plain
of chattel mortgage be seized and delivered to it. oversight on the part of the staff.
3. Petitioners were aware that there were five pieces of
Deed of Assignment was reached by negotiations drafted by heavy equipment under chattel mortgage
East West Banking which provides: 4. After delivery, continued negotiation.

“the ASSIGNOR is indebted to the ASSIGNEE in the aggregate Estanislao’s Contention


a. the appellate court erred in ordering the payment of the
sum of P7,305,459.52, Philippine currency, inclusive of accrued
principal obligation in a replevin suit which it erroneously
interests and penalties as of August 16, 2000, and in full
treated as a collection case
payment thereof, the ASSIGNOR does hereby ASSIGN,
b. the deed of assignment is binding between the parties
TRANSFER and CONVEY unto the ASSIGNEE those motor
although it was not signed by the respondent, constituting
vehicles, with all their tools and accessories, more particularly
as it did an offer which they validly accepted
described as follows:
c. the respondent is estopped from collecting or foreclosing on
Make : Isuzu Dump Truck
the second deed of chattel mortgage.
xxx
Make : Isuzu Dump Truck
xxx East West’s Contention
Make : x x x Caterpillar Bulldozer x x x a. No legal effect between the parties for failure of the
respondent to sign the same.
That the ASSIGNEE hereby accepts the assignment in full b. The deed was founded on a mistake on its part because it
payment of the above-mentioned debt x x x. (Emphasis honestly believed that only one chattel mortgage had been
supplied)” constituted to secure the petitioners obligation
c. The non-inclusion of the second deed of chattel mortgage in
the original complaint was a case of plain oversight.
Petitioners affixed their signatures on the deed of assignment.
d. The continued negotiations in August 2001 between the
However, for some unknown reason, respondent banks duly
parties, after delivery of the three units of heavy equipment,
authorized representatives failed to sign the deed. The vehicles proves that petitioners acknowledged their continuing
were delivered. obligations to respondent under the second deed of
mortgage
On October 6, 2000 and March 8, 2001, respectively, petitioners e. the deed of assignment did not have the effect of novating
completed the delivery of the heavy equipment mentioned in the original loan obligation.
the deed of assignment two dump trucks and a bulldozer to
respondent, which accepted the same without objection. Issue:
Did the deed of assignment which expressly provides that the
However, on June 20, 2001, respondent filed a manifestation transfer and conveyance to respondent of three units of heavy
and motion to admit an amended complaint for the seizure equipment and its acceptance thereof shall be in full payment
and delivery of two more heavy equipment the bulldozer of the total outstanding obligation to the latter operate to
extinguish the debt, such that it is a bar to replevin suit?
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 100

HELD: This being so, the amended complaint for replevin


Discussion: The petition has merit. The deed of assignment was should be dismissed, because the chattel mortgage agreement
a perfected agreement which extinguished petitioners total upon which it is based had been rendered ineffectual.
outstanding obligation to the respondent. The deed explicitly
provides that the assignor (petitioners), in full payment of its WHEREFORE, the petition is GRANTED. The Decision of the
obligation in the amount of P7,305,459.52, shall deliver the Court of Appeals dated April 13, 2007 in CA-G.R. CV No. 87114
three units of heavy equipment to the assignee (respondent), and its Resolution dated June 25, 2007 are hereby SET ASIDE.
which accepts the assignment in full payment of the above- The March 14, 2006 decision of the Regional Trial Court of
mentioned debt. Antipolo, Branch 73, which dismisses Civil Case No. 00-5731, is
hereby REINSTATED.
This simply means, this could only mean that should petitioners
complete the delivery of the three units of heavy equipment
covered by the deed, respondents credit would have been ONG v. ROBAN LENDING CORPORATION (2009)
satisfied in full, and petitioners aggregate indebtedness of
P7,305,459.52 would then be considered to have been paid in Facts: On different dates July 14, 1999 to March 20, 2000,
full as well. petitioner-spouses Wilfredo N. Ong and Edna Sheila Paguio-
Ong obtained several loans from Roban Lending Corporation
The Nature of the Assignment was Dation in Payment (respondent) in the total amount of P4,000,000.00. These loans
It is whereby property is alienated to the creditor in satisfaction were secured by a real estate mortgage on petitioner’s parcels
of a debt in money. Such transaction is governed by the law on of land located in Binauganan, Tarlac City.
sales. Even if we were to consider the agreement as a
compromise agreement, there was no need for respondent’s On February 12, 2001, petitioners and respondent executed an
signature on the same, because with the delivery of the heavy Amendment to Amended Real Estate Mortgage
equipment which the latter accepted, the agreement was consolidating their loans inclusive of charges thereon which
consummated. Respondents approval may be inferred from its totaled P5,916,117.50. On even date, the parties executed a
unqualified acceptance of the heavy equipment. Dacion in Payment Agreement wherein petitioners assigned
the properties covered by TCT No. 297840 to respondent in
Upon due acceptance, the contract is perfected, and from that settlement of their total obligation, and a Memorandum of
moment the parties are bound not only to the fulfillment of Agreement.
what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in In April 2002, Spouses Ong filed a complaint before RTC Tarlac
keeping with good faith, usage and law. for declaration of mortgage as abandoned, annulment of
deeds, alleging that the MOA and the Dacion in Payment
With its years of banking experience, resources and manpower, executed are void for being pactum commissorium.
respondent bank is presumed to be familiar with the
implications of entering into the deed of assignment, whose The Spouses alleged that the loan was founded on several
terms are categorical and left nothing for interpretation. The uniform PNs and decried the charges as illegal and revolting as
alleged non-inclusion in the deed of certain units of heavy they show any survival against the loan. Roban maintained the
equipment due to inadvertence, plain oversight or mistake, is legality of its transaction with petitioners.
tantamount to inexcusable manifest negligence, which
should not invalidate the juridical tie that was created. It took CA held RTC decision that there was no pactum commissorium.
them a year before raising an objection.
Issue:
Presumption on the Validity of Contracts Whether or not the MOA and the DPA were considered pactum
Since the agreement was consummated by the delivery on commissorium and thus void.
March 8, 2001 of the last unit of heavy equipment under the
deed, petitioners are deemed to have been released from all Pactum Commissorium Present, Elements
their obligations to respondent. This Court finds that the Memorandum of Agreement and
Dacion in Payment constitute pactum commissorium. The
Since there is no more credit to collect, no principal obligation elements of pactum commissorium, which enable the
to speak of, then there is no more second deed of chattel mortgagee to acquire ownership of the mortgaged property
mortgage that may subsist. without need of any foreclosure proceedings are:
1. There should be a property mortgaged by way of
A chattel mortgage cannot exist as an independent contract security for the payment of the principal obligation.
since its consideration is the same as that of the principal 2. There should be a stipulation for automatic
contract. Being a mere accessory contract, its validity would appropriation by the creditor of the thing mortgaged
depend on the validity of the loan secured by it. in case of non-payment of the principal obligation
within the stipulated period.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 101

IN THE CASE: MOA and DPA contain no provision for CA reversed the dismissal, held that the complaint states a
foreclosure proceedings nor redemption. Under the MOA, cause of action, respondents having alleged that there was
the failure to pay within 1-year gives respondent the power to partial performance of the agreement to settle their obligation
enforce the DPA transferring to it ownership of the properties. via dacion en pago when they agreed to have the properties
Respondent in effect, automatically acquires ownership of the appraised to thus place their agreement within the exceptions
properties upon petitioner’s failure to pay their debt within the provided under Article 1403.
stipulated period.
Dacion en Pago, Concept and Application
In a true dacion en pago, the assignment extinguishes the It is a mode of extinguishing an existing obligation partakes of
monetary debt, but in this case, it was made as a security, as the nature of sale whereby property is alienated to the creditor
evidenced in the nature of the MOA and DPA signed on the in satisfaction of a debt in money. It is an objective novation of
same day. the obligation; hence, common consent of the parties is
HELD: WHEREFORE, the challenged Court of Appeals Decision required in order to extinguish the obligation.
is REVERSED and SET ASIDE. The Memorandum of Agreement Laigo’s Contention
and the Dacion in Payment executed by petitioner- spouses Sometime in December, year 2000, the protest of plaintiffs
Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent notwithstanding and in blatant breach of the agreed "Dacion
Roban Lending Corporation on February 12, 2001 are declared en pago" as the mode of full payment of plaintiffs' mortgage
NULL AND VOID for being pactum commissorium (2088). obligation, defendant Dao Heng Bank proceeded to foreclose
the mortgaged properties above-described and sold said
DAO HENG BANK v. LAIGO (2008) properties which were aggregately valued at more than P20
Million for only P10,776,242.00, an unconscionably very low
Facts: Sps. Lilia and Reynaldo Laigo obtained loans from Dao price;
Heng of P11M and executed Three Real Estate Mortgages
covering two parcels of land. The loans were payable within 12 Dao Heng Contention
months from the execution o the PN. As of 2000, respondents Quite to the contrary, there was no meeting of the minds
failed to settle their outstanding obligation, drawing them between defendant Dao Heng Bank and the plaintiffs to dacion
to verbally offer to cede to Dao Heng one of the mortgaged any of the mortgaged properties as full settlement of the loan.
lots by way of dacion en pago. Appraiser was commissioned.
Although there was a PROPOSAL and NEGOTIATIONS to settle
Dao Heng demanded payment of P10.385M, demand was the loan by way of dacion, nothing came out of said proposal,
unheeded. September 2000, foreclosure proceedings against much less did the negotiations mature into the execution of a
the mortgages and they were sold at a public auction wherein dacion en pago instrument. Defendant Dao Heng Bank found
BDO is the highest bidder. the offer to settle by way of dacion not acceptable and thus, it
opted to foreclose on the mortgage.
Redemption request, after showing the terms and conditions of
redemption, there was nothing heard from the respondents, Being likened to that of a contract of sale, dacion en pago is
would proceed to consolidate the titles after expiration of governed by the law on sales. The partial execution of a contract
redemption period. of sale takes the transaction out of the provisions of the Statute
of Frauds so long as the essential requisites of consent of the
Six days before the expiration of the redemption period or on contracting parties, object and cause of the obligation concur
December 27, 2001, respondents filed a complaint before the and are clearly established to be present.
RTC Quezon for Annulment, Injunction with Prayer for
Temporary Restraining Order (TRO), praying for the annulment IN THE CASE: Respondents claim that petitioner's commissioning
of the foreclosure of the properties subject of the real estate of an appraiser to appraise the value of the mortgaged
mortgages and for them to be allowed "to deliver by way of properties, his services for which they and petitioner paid, and
‘dacion en pago' one of the mortgaged properties as full their delivery to petitioner of the titles to the properties constitute
payment of [their] mortgaged obligation" and to, in the partial performance of their agreement to take the case out of
meantime, issue a TRO directing the defendant-herein petitioner the provisions on the Statute of Frauds.
to desist from consolidating ownership over their properties.
There is no concrete showing, however, that after the
By respondents' claim, Dao Heng verbally agreed to enter into appraisal of the properties, petitioner approved respondents'
a dacion en pago. There was no meeting of the minds. proposal to settle their obligation via dacion en pago. The
delivery to petitioner of the titles to the properties is a usual
RTC granted petitioner’s motion to dismiss. On the basis that condition sine qua non to the execution of the mortgage,
the claim must be based on a document or writing, both for security and registration purposes.
evidencing the alleged dacion en pago, otherwise it cannot be
enforced in action in court. For if the title to a property is not delivered to the mortgagee,
what will prevent the mortgagor from again encumbering it
also by mortgage or even by sale to a third party.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 102

the Lupon Tagapamayapa. When no settlement was reached,


Finally, that respondents did not deny proposing to redeem the petitioner filed a Complaint before the RTC.
mortgages, as reflected in petitioner's June 29, 2001 letter to
them, dooms their claim of the existence of a perfected Guillermo countered that he had already paid the subject loan
dacion en pago. in full. He continuously delivered and sold copra to petitioner
from April 1998 to April 1999. Respondent said they had an oral
HELD: WHEREFORE, the Court of Appeals Decision of January arrangement that the net proceeds thereof shall be applied as
26, 2006 is REVERSED and SET ASIDE. The Resolution of July 2, installment payments for the loan.
2002 of the Regional Trial Court of Quezon City, Branch 215 He alleged that his deliveries amounted to ₱420,537.68 worth
dismissing respondents' complaint is REINSTATED. of copra. To bolster his claim, he presented copies of pesadas
issued by Elena and Vicente. He pointed out that the pesadas
did not contain the notation pd, which meant that actual
payment of the net proceeds from copra deliveries was not
given to him, but was instead applied as loan payment.
TAN SHUY v. MAULAWIN (2012)
He averred that Tan Shuy filed a case against him, because
Facts: Petitioner Tan Shuy is engaged in the business of petitioner got mad at him for selling copra to other copra
buying copra and corn in the Fourth District of Quezon buyers.
Province. According to Vicente Tan (Vicente), son of petitioner,
whenever they would buy copra or corn from crop sellers, they RTC. Net proceeds from Guillermos copra deliveries
would prepare and issue a pesada in their favor. represented in the pesadas, which did not bear the notation pd
should be applied as installment payments for the loan. It gave
A pesada is a document containing details of the transaction, weight and credence to the pesadas, as their due execution and
including the date of sale, the weight of the crop delivered, the authenticity was established by Elena and Vicente, children of
trucking cost, and the net price of the crop. He then explained petitioner. CA affirmed finding, it gave credence to the
that when a pesada contained the annotation pd on the total testimony of respondent Guillermo in that the net proceeds
amount of the purchase price, it meant that the crop delivered from the copra deliveries were applied as installment payments
had already been paid for by petitioner. for the loan.

Issues:
Guillermo Maulawin (Guillermo), is a farmer-businessman (1) Whether the pesadas require authentication before
engaged in the buying and selling of copra and corn. On 10 July
they can be admitted in evidence, and
1997, Tan Shuy extended a loan to Guillermo in the amount of
(2) Whether the delivery of copra amount to installment
₱420,000. In consideration thereof, Guillermo obligated
payments for the loan obtained by respondents from
himself to pay the loan and to sell lucad or copra to petitioner.
petitioner.
Below is a reproduction of the contract:
First Issue: We found no clear showing that the trial court and
the CA committed reversible errors of law in giving credence
No 2567 Lopez, Quezon July 10,
and according weight to the pesadas presented by
1997
respondents. As reproduced above, the trial court found that
the due execution and authenticity of the pesadas were
Tinanggap ko kay G. TAN SHUY ang halagang . (P420,000.00)
salaping Filipino. Inaako ko na isusulit sa kanya ang aking LUCAD at established by the plaintiffs daughter Elena Tan and sometimes
babayaran ko ang nasabing halaga. Kung hindi ako makasulit ng by plaintiffs son Vicente Tan.
LUCAD o makabayad bago sumapit ang ., 19 maaari niya akong
ibigay sa may kapangyarihan. Kung ang pagsisingilan ay RULE: In any event, petitioner is already estopped from
makakarating sa Juzgado ay sinasagutan ko ang lahat ng kaniyang questioning the due execution and authenticity of the pesadas.
gugol. Tan Shuy could have easily belied the existence of the pesadas
or receipts, and the purposes for which they were offered in
P................ [Sgd. by respondent]
evidence by simply presenting his daughter, Elena Tan Shuy, but
.
Lagda no effort to do so was actually done by the former given that
scenario. The pesadas having been admitted in evidence, with
According to Vicente, part of their agreement with Guillermo petitioner failing to timely object thereto, these documents are
was that they would put the annotation sulong on the pesada already deemed sufficient proof of the facts contained therein.
when partial payment for the loan was made.
The pesadas served as proof that the net proceeds from the
Petitioner alleged that despite demands Guillermo only copra deliveries were used as installment payments for the
remitted a total of P28,500 with an outstanding balance of debts of respondents.
P391,500. Thus, convinced that Guillermo no longer had the
intention to pay the loan, petitioner brought the controversy to Dation in Payment, Present
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 103

Dation in payment extinguishes the obligation to the extent of (FEBTC). That same day, the spouses Serfino’s counsel sent two
the value of the thing delivered, either as agreed upon by the letters to FEBTC informing the bank that the deposit in Grace’s
parties or as may be proved, unless the parties by agreement name was owned by the spouses Serfino by virtue of an
express or implied, or by their silence consider the thing as assignment made in their favor by the spouses Cortez.
equivalent to the obligation, in which case the obligation is
totally extinguished. On April 25, 1996, the spouses Serfino instituted Civil Case No.
95- 9344 against the spouses Cortez, Grace and her husband,
IN THE CASE: As found by the trial court, preponderance of Dante Cortez, and FEBTC for the recovery of money on deposit
evidence is on the side of the defendant. The defendant and the payment of damages, with a prayer for preliminary
explained that for the receipts (pesadas) from April 1998 to attachment.
April 1999 he only gets the payments for trucking while the
total amount which represent the total purchase price for On April 26, 1996, Grace withdrew ₱ 150,000.00 from her
the copras that he delivered to the plaintiff were all given savings account with FEBTC. On the same day, the spouses
to Elena Tan Shuy as installments for the loan he owed to Serfino sent another letter to FEBTC informing it of the pending
plaintiff. action; attached to the letter was a copy of the complaint filed
as Civil Case No. 95-9344.
Since the total amount of defendants loan to the plaintiff is During the pendency of Civil Case No. 95-9344, the spouses
P420,000.00 and the evidence on record shows that the actual Cortez manifested that they were turning over the balance
amount of payment made by the defendant from the proceeds of the deposit in FEBTC (amounting to ₱ 54,534.00) to the
of the copras he delivered to the plaintiff is P378,952.43, the spouses Serfino as partial payment of their obligation under the
defendant is still indebted to the plaintiff in the amount of compromise judgment. The RTC issued an order dated July 30,
P41,047.53 (due to the corn pesadas). 1997, authorizing FEBTC to turn over the balance of the deposit
to the spouses Serfino.
RULE: The subsequent arrangement between Tan Shuy and
Guillermo can thus be considered as one in the nature of On February 23, 2006, the RTC issued the assailed decision
dation in payment. There was partial payment every time (a) finding the spouses Cortez, Grace and Dante liable for
Guillermo delivered copra to petitioner, chose not to collect the fraudulently diverting the amount due the spouses Serfino, but
net proceeds of his copra deliveries, and instead applied the (b) absolving FEBTC from any liability for allowing Grace to
collectible as installment payments for his loan from Tan Shuy. withdraw the deposit. The RTC declared that FEBTC was not a
We therefore uphold the findings of the trial court, as affirmed by party to the compromise judgment; FEBTC was thus not
the CA, that the net proceeds from Guillermos copra deliveries chargeable with notice of the parties’ agreement, as there was
amounted to ₱378,952.43. With this partial payment, no valid court order or processes requiring it to withhold
respondent remains liable for the balance totaling ₱41,047.57. payment of the deposit. Given the nature of bank deposits,
FEBTC was primarily bound by its contract of loan with Grace.
SERFINO v. FEBTC (2012) There was, therefore, no legal justification for the bank to refuse
payment of the account, notwithstanding the claim of the
Facts: There was an action for collection of of sum of money spouses Serfino as stated in their three letters.
instituted by the petitioner spouses Godfrey and Gerardina
Serfino (collectively, spouses Serfino) against the spouses Serfino Contention
Domingo and Magdalena Cortez (collectively, spouses Cortez). Upon receipt of a notice of adverse claim in proper form, it
becomes the duty of the bank to: 1. Withhold payment of the
By way of settlement, the spouses Serfino and the spouses deposit until there is a reasonable opportunity to institute legal
Cortez executed a compromise agreement on October 20, proceedings to contest ownership; and 2) give prompt notice
1995, in which the spouses Cortez acknowledged their of the adverse claim to the depositor. The bank may be held
indebtedness to the spouses Serfino in the amount of ₱ liable to the adverse claimant if it disregards the notice of
108,245.71. To satisfy the debt, Magdalena bound herself "to adverse claim and pays the depositor.
pay in full the judgment debt out of her retirement benefits.
By allowing Grace to withdraw the deposit that is due them
Payment of the debt shall be made one (1) week after under the compromise judgment, the spouses Serfino claim
Magdalena has received her retirement benefits from the that FEBTC committed an actionable wrong that entitles them
Government Service Insurance System (GSIS). In case of default, to the payment of actual and moral damages.
the debt may be executed against any of the properties of the
spouses Cortez that is subject to execution, upon motion of the FEBTC’s Defense
spouses Serfino. Insists on the correctness of the RTC ruling. It claims that it is
not bound by the compromise judgment, but only by its
No payment was made as promised. Instead, Godfrey contract of loan with its depositor.
discovered that Magdalena deposited her retirement benefits
in the savings account of her daughter-in-law, Grace Cortez, As a loan, the bank deposit is owned by the bank; hence, the
with the respondent, Far East Bank and Trust Company, Inc. spouses Serfino’s claim of ownership over it is erroneous.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 104

Magdalena Cortez undertake[s] and bind[s] herself to pay in full the


Issue: judgment debt out of her retirement benefits as Local [T]reasury
The determination of the obligation of banks to a third party Operation Officer in the City of Bacolod, Philippines, upon which full
payment, the plaintiffs waive, abandon and relinquish absolutely any of
who claims rights over a bank deposit standing in the name of
their claims for attorney’s fees stipulated in the Promissory Note (Annex
another. "A" to the Complaint).15 [emphasis ours]

Discussion: We find the petition unmeritorious and see no Only when Magdalena has received and turned over to the
reason to reverse the RTC’s ruling. spouses Serfino the portion of her retirement benefits
corresponding to the debt due would the debt be deemed
The spouses Serfino’s claim for damages against FEBTC is paid.
premised on their claim of ownership of the deposit with FEBTC.
The deposit consists of Magdalena’s retirement benefits, which ONLY A RECOURSE: In the present case, the judgment debt was
the spouses Serfino claim to have been assigned to them under not extinguished by the mere designation in the compromise
the compromise judgment. judgment of Magdalena’s retirement benefits as the fund from
which payment shall be sourced.
That the compromise agreement authorizes recourse in case of
SERFINO CLAIM: That the retirement benefits were deposited in default on other executable properties of the spouses Cortez, to
Grace’s savings account with FEBTC supposedly did not divest satisfy the judgment debt, further supports our conclusion that
them of ownership of the amount, as "the money already there was no assignment of Magdalena’s credit with the GSIS
belongs to the [spouses Serfino] having been absolutely that would have extinguished the obligation.
assigned to them and constructively delivered by virtue of the
x x x public instrument[.]" By virtue of the assignment of Since no valid assignment of credit took place, the spouses
credit, the spouses Serfino claim ownership of the deposit, Serfino cannot validly claim ownership of the retirement
and they posit that FEBTC was duty bound to protect their right benefits that were deposited with FEBTC. Without ownership
by preventing the withdrawal of the deposit since the bank had rights over the amount, they suffered no pecuniary loss that has
been notified of the assignment and of their claim. to be compensated by actual damages. The grant of actual
damages presupposes that the claimant suffered a duly proven
COURT:We find no basis to support the spouses Serfino’s claim pecuniary loss.
of ownership of the deposit.
Claim for moral damages not meritorious because no duty
"An assignment of credit is an agreement by virtue of which exists on the part of the bank to protect interest of third
the owner of a credit, known as the assignor, by a legal cause, person claiming deposit in the name of another.
such as sale, dation in payment, exchange or donation, and
without the consent of the debtor, transfers his credit and In the absence of a law or a rule binding on the Court, it has no
accessory rights to another, known as the assignee, who option but to uphold the existing policy that recognizes the
acquires the power to enforce it to the same extent as the fiduciary nature of banking. It likewise rejects the adoption of a
assignor could enforce it against the debtor. judicially-imposed rule giving third parties with unverified
claims against the deposit of another a better right over the
It may be in the form of sale, but at times it may constitute a deposit.
dation in payment, such as when a debtor, in order to obtain
a release from his debt, assigns to his creditor a credit he has As current laws provide, the bank’s contractual relations are
against a third person." with its depositor, not with the third party; "a bank is under
obligation to treat the accounts of its depositors with
As a dation in payment, the assignment of credit operates as meticulous care and always to have in mind the fiduciary nature
a mode of extinguishing the obligation; the delivery and of its relationship with them.
transmission of ownership of a thing (in this case, the credit due
from a third person) by the debtor to the creditor is accepted "In the absence of any positive duty of the bank to an adverse
as the equivalent of the performance of the obligation.” claimant, there could be no breach that entitles the latter to
moral damages.
The terms of the compromise judgment, however, did not
convey an intent to equate the assignment of Magdalena’s HELD: Petition for review is denied and decision of RTC
retirement benefits (the credit) as the equivalent of the affirmed. Costs against the petitioners.
payment of the debt due the spouses Serfino (the obligation).
There was actually no assignment of credit; if at all, the PEN v. JULIAN (2016)
compromise judgment merely identified the fund from which
payment for the judgment debt would be sourced: Facts: The Julians obtained P60K loan from Adelaida Pen. On
May 23, 1986, ey were again extended loans in the amounts of
(c) That before the plaintiffs file a motion for execution of the decision
P50,000.00 and P10,000.00, respectively by appellant Adelaida.
or order based [on this] Compromise Agreement, the defendant,
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 105

Two (2) promissory notes were executed by the appellees in valid, rendering the respondents liable to still pay their
favor of appellant Adelaida to evidence the foregoing loans, As outstanding obligation with interest.
security, on May 23, 1986, the appellees executed a Real Estate
Mortgage over their property covered by TCT No. 327733 CA affirmed and pronounced Deed of Sale as void, but not
registered under the name of appellee Santos Julian, Jr. The because of lack of consideration but because deed of sale
owner's duplicate of TCT No. 327733 was delivered to the Pens. having been executed at the same time as the real estate
mortgage, which rendered the sale as a prohibited pactum
Pen’s Allegation commissorium in light of the fact that the deed of sale was
When the loans became due and demandable, appellees failed blank as to the consideration and the date.
to pay despite several demands. As such, appellant Adelaida
decided to institute foreclosure proceedings. However, she was Issues
prevailed upon by appellee Linda not to foreclose the property (1) Whether or not the CA erred in ruling against the
because of the cost of litigation and since it would cause her validity of the deed of sale.
embarrassment as the proceedings will be announced in public (2) Whether or not the CA erred in ruling that no monetary
places at the City Hall, where she has many friends. interest was due for Linda’s use of Adelaida’s money.
Instead, appellee Linda offered their mortgaged property as Deed of Sale as Pactum Commissorium
payment in kind. After the ocular inspection, the parties Article 2088 of the Civil Code prohibits the creditor from
agreed to have the property valued at P70,000.00. Thereafter, appropriating the things given by way of pledge or mortgage,
on October 22, 1986 appellee executed a two (2) page Deed or from disposing of them; any stipulation to the contrary is null
of Sale duly signed by her on the left margin and over her and void.
printed name.
The first element was present considering that the property of
OFFERED 100,000: Upon the agreement of the parties, the amount the respondents was mortgaged by Linda in favor of Adelaida
of P100,000.00 was deducted from the balance of the appellees' as security for the farmer's indebtedness.
indebtedness, so that as of October 15, 1997, their unpaid
balance amounted to P319,065.00. Appellants allege that As to the second, the authorization for Adelaida to appropriate
instead of paying lthe] said balance, the appellees instituted on the property subject of the mortgage upon Linda's default was
September 8, 1994 the civil complaint and filed an adverse implied from Linda's having signed the blank deed of sale
claim and lis pendens which were annotated at the back of the simultaneously with her signing of the real estate
title to the property. mortgage.

Julian’s Allegations The haste with which the transfer of property was made upon
At the time the mortgage was executed, they were likewise the default by Linda on her obligation, and the eventual transfer
required by the appellant Adelaida to sign a one (1) page of the property in a manner not in the form of a valid dacion en
document purportedly an "Absolute Deed of Sale". Said pago ultimately confirmed the nature of the transaction as a
document did not contain any consideration, and was pactum commissorium.
"undated, unfilled and unnotarized". They allege that their
total payments amounted to P115,400.00 and that their last The CA justly deduced that the completion and execution of the
payment was on June 28, 1990 in the amount of P100,000.00. deed of sale had been conditioned on the non-payment of the
debt by Linda, and reasonably pronounced that such
Linda Julian offered to pay appellant Adelaida the amount of circumstances rendered the transaction pactum commissorium.
P150,000.00. The latter refused to accept the offer and
demanded that she be paid the amount of P250,000.00. Unable Elements of Valid Dacion En Pago
to meet the demand, appellee Linda desisted from the offer and 1. The existence of money obligation
requested that she be shown the land title which she conveyed 2. The alienation to the creditor of a property by the
to the appellee Adelaida, but the latter refused. Upon debtor with the consent of the former.
verification with the Registry of Deeds of Quezon City, she was 3. The satisfaction of the money obligation of the debtor.
informed that the title to the mortgaged property had already To have a valid dacion en pago, therefore, the alienation of
been registered in the name of appellee Adelaida under TCT the property must fully extinguish the debt. Yet, the debt of
No. 364880, and that the transfer was entered on July 17, 1987. the respondents subsisted despite the transfer of the property in
favor of Adelaida.
RTC ruled in favor of the Julians, trial court concluded that they
had not agreed on the consideration for the sale at the time “THEY STILL HAVE TO AGREE WITH THE PRICE” The petitioners insist
they signed the deed of sale; that in the absence of the that the parties agreed that the deed of sale would not yet
consideration, the sale lacked one of the essential requisites contain the date and the consideration because they had still
of a valid contract; that the defense of prescription was to agree on the price. On October 15, Linda offered to sell the
rejected because the action to impugn the void contract was mortgaged property, while on October 18 they had ocular
imprescriptible; and that the promissory notes and the real inspection, If that was so, there was no plausible reason for still
estate mortgage in favor of the petitioners were nonetheless leaving the consideration on the deed of sale blank if the deed
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 106

was drafted by Adelaida on October 20, 1986, especially fact, they continuously availed of and benefit from the credit
considering that they could have conveniently communicated facilities for five years.
with each other in the meanwhile on this significant aspect of
their transaction. RTC upheld the validity of the promissory notes. It found that,
in 2001 alone, Equitable restructured loans amounting to
CONSENT, OBJECT, CONSIDERATION. Perfection of contract upon US$228,200 and P1M. It invalidated the escalation clause
meeting of the minds of the parties on each of these requisites. contained therein because it violated the principle of mutuality
To reach that moment of perfection, the parties must agree on of contracts. Nevertheless, it took judicial notice of the
the same thing in the same sense, so that their minds meet as depreciation of peso during the intervening period and
to all the terms. declared the existence of extraordinary deflation.
Subsequently, RTC ordered the use of the 1996-dollar exchange
They must have a distinct intention common to both and rate in computing respondents’ dollar-denominated loans.
without doubt or difference; until all understand alike, there can Equitable was made to pay the sum of money and for damages
be no assent, and therefore no contract. (due to the effect on the reputation by reason of Equitable
The minds of parties must meet at every point; nothing can be freezing their accounts).
left open for further arrangement. So long as there is any
uncertainty or indefiniteness, or future negotiations or RTC issued an Omnibus Order denying Equitable’s MR for lack
considerations to be had between the parties, there is not a of merit and ordered the issuance of the Writ of Execution.
completed contract, and in fact, there is no contract at all. Upon issue, three real properties were levied upon.

In a sale, the contract is perfected at the moment when the CA granted the injunction application and was issued.
seller obligates herself to deliver and to transfer ownership of a Notwithstanding the injunction, the properties of Equitable
thing or right to the buyer for a price certain, as to which the were sold in public auction and the respondents were the
latter agrees. highest bidders and certificate of sale was awarded to them.

The absence of the consideration from Linda's copy of the CA dismissed the petition for certiorari, it found Equitable guilty
deed of sale was credible proof of the lack of an essential of forum shopping because the bank filed its petition for
requisite for the sale. In other words, the meeting of the minds certiorari in the CA several hours before withdrawing its petition
of the parties so vital in the perfection of the contract of sale for relief in the RTC and failed to disclose the date and
did not transpire. certificate of non-forum shopping. MR was denied.

And, even assuming that Linda's leaving the consideration CONTENTION: Equitable asserts that it was not guilty because the
blank implied the authority of Adelaida to fill in that relief was withdrawn on the same day petition was filed. It also
essential detail in the deed of sale upon Linda's default on ascribed that the petition for certiorari was meritorious because
the loan, the conclusion of the CA that the deed of sale was the RTC committed grave abuse for issuing omnibus order.
a pactum commisorium still holds, for, as earlier Equitable was Not Guilty of Forum Shopping
mentioned, all the elements of pactum commisorium were The petition for relief in RTC and petition for certiorari in CA did
present. not have identical causes of action. Equitable substantially
complied with the rule on forum shopping when it moved to
withdraw its petition for relief in RTC on the same day it filed
1250. Extraordinary Inflation or Deflation for the petition. It was an indication that it had no intention of
maintain two actions at the same time.
EQUITABLE PCI BANK v. NG SHEUNG NGOR (2007)
541 SCRA 223 Trial Court Committed Grave Abuse of Discretion
March 1, 2004 Order denied due course to the notices of appeal
Facts: On October 7, 2001, respondents Ng Sheung Ngor, Ken
of both Equitable and respondents. However, it declared that
Appliance Division, Inc. and Benjamin E. Go filed an action for
the February 5, 2004 decision was final and executory only
annulment and or reformation of documents and contracts
with the respect of Equitable. The execution of decision was
against petitioner Equitable PCI Bank (Equitable) and its
undertaken with indecent haste, effectively obviating or
employees at RTC Cebu. They claimed that Equitable induced
defeating Equitable’s right to avail of possible legal remedies.
them to avail of its peso and dollar credit facilities by offering
low interest rates, so they accepted the proposal and signed the
The Promissory Notes Were Valid
bank’s reprinted promissory notes on various dates.
RTC upheld the validity of the promissory notes, despite
respondent’s assertion that those documents were contracts
They, however, were unaware that the documents contained an
of adhesion.
Identical Escalation Clauses granting Equitable authority to
increase interest rates without their consent.
A contract of adhesion is a contract whereby almost all of its
provisions are drafted by one party. The participation of the
EQUITABLE’S ANSWER: Asserted that respondents knowingly
other party is limited to affixing his signature or his “adhesion”
accepted all the terms and conditions contained in the PNs. In
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 107

to the contract. For this reason, contracts of adhesion are strictly Requisites for Extraordinary Inflation or Deflation
construed against the party who drafted it. to Affect an Obligation
• They are not necessarily invalid, as they are as binding 1. That there was an official declaration of extraordinary
as ordinary contracts. It becomes void only when the inflation or deflation from the BSP;
dominant party takes advantage of the weakness of 2. That the obligation was contractual in nature;
the other party, completely depriving the latter of the 3. That the parties expressly agreed to consider the
opportunity to bargain for an equal footing. effects of the extraordinary inflation or deflation.

IN THIS CASE:As the trial court has noted, if indeed the terms and IN THE CASE:Despite the devaluation of the peso, the BSP never
conditions were prejudicial to the respondents, they could have declared a situation of extraordinary inflation. Moreover,
walked out and negotiated with another bank at the first although it arose from a contract, the parties did not agree to
available instance. But they did not. Instead they continuously recognize the effects of such. Therefore, respondents should
availed of Equitable’s credit facilities for 5 long years. pay their dollar-denominated loans at the exchange rates
fixed by the BSP on the date of the maturity.
While RTC categorically found that respondents had
outstanding dollar and peso-denominated loans with Moral and Exemplary Damages: Lacked Basis for Award
Equitable, it failed to ascertain the total amount. It was not able In breach of contract, moral damages are recoverable only if
to explain how it reach the values. the defendant acted fraudently or in bad faith or in wanton
disregard of his contractual obligations.
Escalation Clause Violated the Principle of
Mutuality of Contracts IN THE CASE: RTC found that respondents did not pay Equitable
Escalation clauses are not void per se. However, one which the interest due or the amount due. The bank has the right to
grants the creditor an unbridled right to adjust the interest set-off the deposits in its hands for the payment of a depositor’s
independently and upwardly, completely depriving the debtor indebtedness. The damages they sustain was due to their failure
of the right to assent to an important modification in the to pay loans. No basis. Exemplary follows moral, thus none.
agreement is considered void. Clauses of that nature violate
the principle of mutuality of contracts. HELD: The respondents Ng Sheung Ngor, doing business
under the name “Ken Marketing”, Ken Appliance Division, Inc.
Article 1309. The contracts must bind both contracting parties; its validity or and Benjamin E. Go to pay Equitable PCI Bank the principal
compliance cannot be left to the will of one of them.
amount of their dollar-and-peso denominated loans.
The Equitable’s promissory notes uniformly stated therein as of:
If subject promissory note is extended, the interest for They are also ordered to pay the interest as based of the time
subsequent extensions shall be at such rate as shall be of demand with rate of 12% per annum until full satisfaction.
determined by the bank. RTC Cebu shall compute the exact amount on the respective
dollar-denominated and peso-denominated loans.
Equitable dictated the interest rates if the term of the loan
was extended. Respondents had no choice but to accept them. ALMEDA v. BATHALA MARKETING (2008)
This was a violation of Article 1308 of the Civil Code. 542 SCRA 470
Furthermore, the assailed escalation clause did not contain the
Facts: Sometime in May 1997, respondent Bathala Marketing
necessary provisions for validity:
as lessee renewed its Contract of Lease with Ponciano L.
1. That the rate of interest will only be increased if the
Almeda, as lessor. Under such, Ponciano agreed to lease a
applicable maximum rate of interest is increased by
portion of the Almeda Compound in Makati consisting of
law or by the Monetary Board.
7,348.25 sq,m., for a monthly rental of P1,107,348.69 for a term
2. That the stipulated rate of interest will be reduced if
of four years from May 1, 1997. The terms of lease were:
the applicable maximum rate of interest is reduced by
law or by the Monetary Board.
SIXTH – It is expressly understood by the parties hereto that the rental
Thus, due to the violation and absence, the escalation clauses rate stipulated is based on the present rate of assessment on the
found in the promissory notes are void. property, and that in case the assessment should hereafter be increased
or any new tax, charge or burden be imposed by authorities on the lot
There Was No Extraordinary Deflation and building where the leased premises are located, LESSEE shall pay,
Extraordinary deflation exists when there is an unusual decrease when the rental provided herein has become due, the additional rental
in the purchasing power of currency and such decrease could or charge corresponding to the portion hereby leased; provided,
however, that in the event that present assessment tax on said property
not be reasonably foreseen or was manifestly beyond the
should be reduced, LESSEE shall be entitled to reduction in the
contemplation of the parties at the time of the obligation.
stipulated rental, likewise in proportion to the portion leased by him;

ARTICLE 1250. In case of extraordinary inflation or deflation of the currency


SEVENTH – In case an extraordinary inflation of devaluation of the
stipulated should intervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is an Philippine Currency should supervene, the value of the Philippine peso
agreement to the contrary. at the time of the establishment of the obligation shall be the basis of
payment.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 108

During the effectivity of the contract, Ponciano died. In a letter, devaluation that would justify the application of Article 1250 of
petitioners advised respondent that the former shall assess and the civil code. Furthermore, absent an official pronouncement
collect the VAT on its monthly rentals. Bathala contended that or declaration by competent authorities of the existence of
VAT may not be imposed as the rentals fixed in the contract of extraordinary inflation during a given period, the effects of
lease were supposed to include the VAT therein. extraordinary inflation are not to be applied.

They received another letter petitioners informing the former


that its monthly rental should be increased by 73% pursuant
to condition 7 of the contract and Article 1250 of the Civil
Code. Respondent opposed demand and insisted that there
was no extraordinary inflation to warrant such application.
Respondents refused to pay VAT and adjusted rentals.

Bathala filed for a declaratory relief on the interpretation of


Conditions 6 and 7. Meanwhile, Eufemia Almeda (wife) and
Romel Almeda (son) filed for an ejectment, rescission and
damage suit for failure to vacate premises after demand.

RTC denied petitioners their right to pas onto the respondent


the burden of paying the VAT since it was not a new tax that
would call for the application of the sixth clause. The court
likewise denied their right to collect the demanded increase for
there was no extraordinary inflation or devaluation under the
seventh clause of the contract of lease. CA affirmed except on
payment and affirmative reliefs.

Issue:
Whether the amount of rentals due the petitioners should be
adjusted by reason of extraordinary inflation or devaluation.

Liability of the Respondent for the Payment of VAT


The person primarily liable for the payment of VAT is the lessor
who may choose to pass it on to the lessee or absorb the same.
Beginning January 1, 1996, the lease of real property ensued.
Notwithstanding the mandatory payment of the 10% VAT by
the lessor, the actual shifting of the said tax burden is clearly
optional. Ponciano did not charge nor provided for its
additional imposition in the 1997 renewal.
The sixth condition as well reads “new taxes” imposed after the
effectivity of the lease, after May 1997 and RA 7716 took effect
in 1994, thus the VAT cannot be considered as “new tax” in May
1997, and it does not fall within the coverage.

Petitioners Cannot Legitimately Demand Rental


Adjustment Because of Extraordinary Inflation
Inflation has been defined as the sharp increase of money or
credit, or both, without a corresponding increase in business
transaction. There is inflation when there is an increase in the
volume of money and credit relative to available goods, resulting
in a substantial and continuing rise in the general price level.

Extraordinary inflation exists when there is a decrease or


increase in the purchasing power of the currency which is
unusual or beyond the common fluctuation in the value of said
currency and it was unforeseen and beyond the contemplation
of the parties at the time of the establishment of obligation.

The factual circumstances obtaining in the present


IN THE CASE:
case do not make out a case of extraordinary inflation or
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 109

OBLIGATIONS AND CONTRACTS The following are considered limitations to the right:
Civil Code 1. If the debtor has two debts, one of P50 and another
for P200 and makes a payment of P50, he cannot
Articles 1252-1261
choose to apply it to the P200 debt because the
creditor cannot be compelled to accept partial
Special Forms of Payment
payments (1248).
Under the Civil Code there are four special forms of payment:
2. If there is only one obligation bearing stipulated
1. Application of payments (1252)
interest, the debtor cannot apply the payment to the
2. Dation in payment (1245)
capital because the law requires its application to the
3. Cession or Assignment in favor of Creditors (1255)
interest first (1253).
4. Tender of payment and consignation (1256)
3. The debtor cannot apply the payment to a debt that
SUBSECTION 1 is not yet liquidated.
APPLICATION OF PAYMENTS 4. He cannot choose a debt with a period for the benefit
of the creditor, when the period has not yet arrived.
ARTICLE 1252 5. When there is a n agreement as to the debts which are
He who has various debts of the same kind in favor of one and to be paid first, the debtor cannot vary the agreement.
the same creditor, may declare at the time of making the
payment, to which of them the same must be applied. Unless
How Application of Payment is Made
the parties so stipulate, or when the application of payment
is made by the party for who benefit the term has been (1) The debtor makes the designation.
constituted, application shall not be made as to debts which (2) If not, the creditor makes it, by so stating in the receipt
are not yet due. that he issues “unless there is cause for invalidating
the contract.”
If the debtor accepts from the creditor a receipt in which an
application of the payment is made, the former cannot Once a receipt has been issued, the debtor cannot contest such
complain of the same, unless there is a cause for invalidating
application made by the creditor which was validated by his
the contract.
acquiescence. But an application made without the knowledge
Application of Payments and consent of the debtor is not valid.
It is the designation of the debt which is being paid by a debtor
who has several obligations of the same kind in favor of the By “invalidating the contract” it really means the debtor’s
creditor to whom payment is made. assent to the application by such causes as mistake, violence,
intimidation, fraud which can invalidate contracts.
The rules under Article 1252 until 1254 apply to a person owing
Tolentino: We must frankly admit that the Code has used erroneous terminology
several debts of the same kind of a single creditor. Simply for it the real intention of the law is that the application made by the creditor can
stated, it is the phrase applied to show which debt, out of two or be contested by the debtor.
more debts owing to the same creditor, is being paid.
(3) If neither, or the application is not valid, then
Example. Allan owes B P1M due on April 1, and he still owes P1M on application is made by operation of law under Articles
April 5 and another P1M on April 10. There is a need to know the 1253 and 1254.
application of payments to know what obligation will be extinguished.
Revocation
Requisites to Use Application of Payments GENERAL RULE: Once application of payment is made, it cannot
1. There must be two or more debts (severality of debts). be revoked.
2. The debts must be of the same kind.
EXCEPTION: If both parties agree, however, if it will prejudice
3. The debts are owed by the same debtor in favor to the
third persons it cannot be invoked.
same creditor (thus, only one creditor and debtor).
4. All the debts must be due unless otherwise stipulated.
When Application Must be Made
5. They payment is not enough to extinguish all debts.
Application must be made at the time when payment by the
debtor is made, not afterwards.
Rule When Debts are Not Yet Due
Despite the facts that not all the debts are not yet due, there
When Application Cannot be Availed Of
can be application of payments only when:
(1) In case of a partner-creditor
1. If the parties so stipulate.
(2) Surety or a solidary guarantor. There is only one debt
2. When the application of payment is made by the party
and that it is contingent on the failure of principal.
for whose benefit of the term has been constituted.

Instance. Debtor has P50,000 and the debtor has to make the
Preferential Right of Debtor
choice: (1) 20,000 with 6% interest due today; (2) 20,000 due
It is the debtor who is given by the law the right to select which
today secured by mortgage; (3) 10,000 (4) a 4-carat ring and
of his debts he is paying. This right is not absolute however. He
(5) 50,000 with interest and penalty due two years from now.
cannot impair the rights granted by the law to the creditor.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 110

ARTICLE 1253 SUBSECTION 2


If the debt produces interest, payment of the principal shall PAYMENT BY CESSION
not be deemed to have been made until the interests have
been covered. ARTICLE 1255
The debtor may cede or assign his property to his creditors
Interest Must be Paid First in payment of his debts. This cession, unless there is
This is obligatory. The debtor cannot insist that his payment be stipulation to the contrary, shall only release the debtor from
credited to the principal instead of the interest, unless the responsibility for the net proceeds of the thing assigned. The
agreements which, on the effect of the cession, are made
creditor agrees otherwise. However, if this is allowed, the result
between the debtor and his creditor shall be governed by
in the reduction of the principal leads to the decrease of the special laws.
total interest collectable.
Payment by Cession, Concept
What Interest Is Supposed to be Paid It is the process of transfer of debtor’s property to the creditors
1. Interest by way of compensation; and not subject to execution so that the latter may sell them and
2. Interest by way of damages due to default. thus apply the proceeds to their credits. The purpose of the
transfer or assignment or the cession is for the creditors to sell
ARTICLE 1254 these properties, and to apply the proceeds in proportion to
When payment cannot be applied in applied in accordance
their respective credit.
with the preceding rules, or if application cannot be inferred
from other circumstances, the debt which is most onerous to
the debtor, among those due, shall be deemed to have been Kinds of Assignment
satisfied. 1. Legal – majority of the creditors must agree, governed
by the insolvency law.
If the debts due are of the same nature and burden, the 2. Voluntary – Article 1255, wherein all creditors must
payment shall be applied to all of them proportionately. agree for such to apply.

Rules in Case No Application of Payment Made Requisites for Voluntary Assignment


1. Apply it to the most onerous (in case the due and 1. More than one debt
demandable debts are of different natures) 2. More than one creditor
2. If the debts are of the same nature and burden, 3. Complete or partial insolvency of the debtor
application shall be made to all proportionately. 4. Abandonment of all debtor’s property not exempt
from the execution (unless validly waived)
Q. Debt 1 is for P1M while Debt 2 is for P2M and only P1M is 5. Acceptance or consent on the part of creditors
paid, how will the payment be applied?
Effect of Voluntary Assignment
A. If the debtor makes the application, the payment should be a. Creditors do not become owners; merely assignees,
credited to Debt 1. The debtor cannot insist that the creditor with authority to sell;
accept it for the second debt because he cannot be compelled b. Debtor is released up to the amount of the need
to receive partial payments. proceeds, unless stipulated.
c. Creditors will collect credits in the order of preference
If no application has been made, the law steps in, and agreed upon or in default, in the order established by
application will be made not equally but proportionately. law.

More Onerous Debts


Dacion En Pago Cession
1. Older ones, in case of running accounts.
Does not affect all the In general, affects all the
2. Interest-bearing debts even if the non-interest-
properties properties of debtor
bearing debt is older.
Does not require plurality of Requires more than one
3. Of two interest-bearing debts, that which charges the
creditors creditor
higher interest.
Only the specific or Requires the consent of all
4. Debts secured by mortgage or by pledge.
concerned creditor’s the creditors
5. Debts with a penalty clause.
consent is required
6. Advances for subsistence are more onerous than cash
May take place during the Requires full or partial
advance.
solvency of the creditor insolvency
7. A debt where the debtor is in mora is more onerous
Transfers ownership upon Does not transfer
than one where he is not.
delivery ownership, only possession
8. An exclusive debt is more onerous than solidary debt.
and administration are
transferred with authority to
NOTE: The following will not apply when application was made.
sell and convert to cash
In case of determining which is most onerous, the particular
circumstance with significant bearing at hand should be There is an of novation. This is not an act of
observed and balancing, applied proportionately as last resort. novation.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 111

SUBSECTION 3 When Consignation is Sufficient Without Prior Tender


TENDER OF PAYMENT AND CONSIGNATION 1. When the creditor is absent or unknown or does not
appear at the place of payment (need not be judicially
Tender of Payment, Defined declared an absentee).
It is the act of offering the creditor what is due him together 2. When the creditor is incapacitated to receive payment
with a demand that the creditor accepts the same. It is a at the time it is due (unless there is representative).
manifestation made by the debtor to the creditor of his desire 3. When, without just cause, the creditor refuses to give it
to comply with the obligation with the offer of immediate receipt.
performance. 4. When two or more people claim the same right to
collect (an action for interpleader would be proper).
Consignation, Defined 5. When the title (written document) of the obligation
The act of depositing the thing due with the court or judicial has been lost.
authorities whenever the creditor cannot accept or refuses to 6. When the debtor has been previously notified by the
accept payment. It generally requires a prior tender of payment. creditor that the latter would not accept payment.

NOTE: Tender of payment, therefore, is a preparatory act which ARTICLE 1257


precedes consignation. The tender of payment by itself does In order that the consignation of the thing due may release
not cause the extinguishment of the obligation, unless the obligor, it must first be announced to the persons
completed by consignation. interested in the fulfillment of the obligation.

It is the consignation which constitutes a form of payment, and The consignation shall be ineffectual if its not made strictly
in consonance with the provisions which regulate payment.
must follow, supplement, or complete the tender of payment in
order to discharge the obligation.
Essential Requisites of Consignation
1. Existence of valid debt
ARTICLE 1256
2. Valid prior tender, unless tender is excused
If the creditor to whom tender of payment has been refuses
without just cause to accept it, the debtor shall be released 3. Prior notice of consignation (before deposit)
from responsibility by the consignation of the thing or sum 4. Actual consignation (deposit)
due. 5. Subsequent notice of consignation

Consignation alone shall produce the same effect in the Effects of the Deposit
following cases: 1. The property is in custodia legis
(1) When the creditor is absent or unknown, or does
2. Exempt from attachment or execution
appear at the place of payment;
(2) When he is incapacitated to receive the payment at 3. But if the property is perishable by nature, the court
the time it is due; may order the sale of the property
(3) When, without just cause, he refuses to give a 4. The debtor becomes the agent or receiver of the court
receipt;
(4) When two or more persons claim the same right to ARTICLE 1258
collect; Consignation shall be made by depositing the things due at
(5) When the title of the obligation has been lost the disposal of judicial authority, before whom the tender of
payment shall be proved, in a proper case, and the
Requisites for a Valid Tender of Payment announcement of the consignation in other cases.
1. It must be in legal tender (lawful currency) – not a
check but if there is consent then it is valid. How is Consignation Made?
2. It must include whatever interest is due. (1) The things due must be deposited with the proper
3. It must be unconditional; but if made with conditions judicial authorities.
and no protest on the creditor’s part he cannot later (2) There must be proof that:
one prescribe the terms for the validity of the a. Tender had been previously made.
acceptance which he had already made as there is b. Or that the creditor had previously notified
complete payment. the debtor that the consignation will be
4. The obligation must be due. made.

Unjust Refusal of the Tender of Payment ARTICLE 1259


The expenses of consignation, when properly made, shall be
1. That there was a previous tender of payment.
charged against the creditor.
2. That the tender of payment was of the very thing due,
or in case of money obligation, the that legal tender NOTE: Clearly, the consignation is due to the creditor’s fault,
currency was offered; for had he accepted, there would not have been any need for
3. That the tender of payment was unconditional; and the consignation. If not proper, against the creditor. Expenses
4. That the creditor refused to accept payment without include the preservation and warehousing of the goods.
just cause.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 112

ARTICLE 1260 SECTION 2


Once the consignation has been duly made, the debtor may LOSS OF THE THING DUE
ask the judge to order the cancellation of the obligation.
When Is a Thing Considered Lost
Before the creditor has accepted the consignation, or before a. When it perishes
a judicial declaration that the consignation has been b. When it goes out of commerce
properly made, the debtor may with draw the thing or the
c. When it disappears in such a way that;
sum deposited, allowing the obligation to remain in force.
• Its existence is unknown
Effects of Valid Consignation • It cannot be recovered
1. Debtor may ask the judge to cancel the obligation NOTE: The terms loss does not refer strictly to actual or physical
2. The running of interest is suspended loss but also contemplates impossibility of performance.
3. It should be observed that before the creditor accepts
or before the judge declares the consignation has What Possibility of Performance Includes
been properly made, the obligation remains. (a) Physical impossibility
(b) Legal impossibility, which is either;
TOLENTINO: The following effects arise as of the time the things was placed at a. Directly caused as when prohibited by law;
the disposal of the court: b. When debtor is required to enter military
1. The debtor is released in the same manner as if he had performed the
draft
obligation at the time of the consignation, because this produces the
same effect as a valid payment. (c) Moral impossibility (1267)
2. The accrual of interest on the obligation is suspended from the
moment of consignation. ARTICLE 1262
3. The deteriorations or loss of the thing or amount consigned occurring An obligation which consists in the delivery of a determinate
without the fault of the debtor must be borne by the creditor, because thing shall be extinguished if it should be lost or destroyed
the risks of the thing are transferred to the creditor from the moment
without the fault of the debtor, and before he has incurred in
of deposit.
4. Any increment or increase in value of the thing after the consignation
delay.
inures to the benefit of the creditor.
When by law or stipulation, the obligor is liable even for
fortuitous events, the loss of the thing does not extinguish
Effects of Improper Consignation
the obligation, and he shall be responsible for damages. The
1. Obligation remains for the consignation was not an same rule applies when the nature of the obligations
effective payment. requires the assumption of risk.
2. If at the time of the consignation the debt is due and
requisites for a valid consignation are absent, the Two Kinds of Obligation to Give
debtor is now in default. 1. To give a generic thing;
2. To give a specific thing
Effect of Dismissal of the Case
If the case in which the consignation was made is dismissed by Effect of Loss to Deliver a Specific Thing
the court, the consignation naturally would produce no effect. GENERAL RULE: The obligation is extinguished.

When May Debtor Withdraw EXCEPTIONS: The


obligation is not extinguished in the following:
• As a matter of right: 1. When the debtor is at fault.
o Before the creditor accepted consignation 2. When the debtor is made liable for a fortuitous event:
o Before there is a judicial declaration that the a. By provision of law
consignation has been properly made b. Of a contractual stipulation
c. Assumption of risk on the part of debtor
• As a matter of privilege:
o When after proper consignation, the creditor Other instances which the law requires li ability despite the case
authorizes the debtor to withdraw thing. of fortuitous event:
1. Debtor is in default
ARTICLE 1261 2. When the debtor has promised to deliver the same to
If the consignation having been made, the creditor should two or more persons
authorize the debtor to withdraw the same, he shall lose
3. Obligations arising from the crime
every preference which he may have over the thing. The co-
debtors, guarantors and sureties shall be released. 4. When a borrower has lent the things to another who
is not a member of his own household
Effects of Article 1261 5. When the thing loaned has been delivered with
a. The obligation remains. appraisal of value, unless provided
b. The creditor loses any preference (priority) over the 6. When payee is solutio indebiti in bad faith
thing. ARTICLE 1263
In an obligation to deliver a generic thing, the loss or
c. The co-debtors (solidary), guarantors and sureties are
destruction of anything of the same kind does not extinguish
released (unless they consented). the obligation.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 113

Effect of Loss on Obligation to Deliver a Generic thing


GENERAL RULE: The obligation continues to exist because a Effect of subjective impossibility
generic thing does not really perish. The extinguishment of the obligation depends. Usually the
obligations subsist unless personal considerations are involved
EXCEPTIONS: The following can be considered as exceptions: such as when only a particular company is prohibited by law to
1. Delimited generic thing (e.g. 50 kilos of sugar). furnish work on a certain day.
2. If generic thing has been segregated or set aside.
Effect of Loss Through a Fortuitous Event
Monetary Obligations in Reciprocal Obligations
An obligation to pay money, such as one under a pension plan, GENERAL RULE: The obligation that was not extinguished by
is generic. Here failure to raise funds not a defense. fortuitous event remains.

ARTICLE 1264 EXCEPTIONS: Some exceptions are provided for by law, such as:
The courts shall determine whether, under the
circumstances, the partial circumstances, the partial loss of 1. In the case of lease, if the object is destroyed both the
the object of the obligation is so important as to extinguish
lease and the obligation to pay exintguished.
the obligation
2. In contracts for a piece of work – the worker cannot ask
Effect of Loss for the price if the thing lost by fortuitous event prior
The rule under this is for those under fortuitous events. In to delivery (worker’s risk).
certain cases, partial loss may indeed be equivalent to a
complete loss. The judicial determination of the effect is needed Forms of Impossibility
(e.g. fountain pen is lost except the cover). 1. Physical
2. Legal
ARTICLE 1265 3. Objective
Whenever the thing is lost in the possession of the debtor, it 4. Subjective
shall be presumed that the loss was due to his fault, unless
there is proof to the contrary, and without prejudice to the Partial Impossibility
provisions of Article 1165. This presumption does not apply The rule in Article 1264 is applied. There is a need to refer to
in case of earthquake, flood, storm, or other natural calamity.
Articles 1234 and 1235. If at the time the performance becomes
impossible and the debtor has already performed its
Presumption of Loss was Due to Debtor’s Fault
obligations, the creditor must pay the part done so long as he
The debtor is presumed to be at fault. If a person for example
benefits for the compliance, or the debtor must return anything
is entrusted with several of cattle and he cannot account for the
more than what corresponds to the part already performed.
missing ones, he is presumed to be at fault.

Temporary Impossibility
When Presumption Does Not Apply
Temporary obstacles which may be expected to disappear in
The presumption of fault does not apply in the case of a natural
the future, do not extinguish the obligation, but merely delays
calamity. Although fire is not a natural calamity, if a tenant is
its fulfillment, unless it must be performed in a determinate
able to prove that the fire caused in his apartment was purely
time. But if indefinite or unknown duration, the obligation may
accidental he is not liable.
juridically be considered as impossible.
ARTICLE 1266
The debtor in obligations to shall also be released when the ARTICLE 1267
prestation becomes legally or physically impossible without When the service has become so difficult as to be manifestly
the fault of the obligor. beyond the contemplation of the parties, the obligor may
also be released therefrom, in whole or in part.
When the Impossibility Must Exist
Effect of Difficulty Beyond the Parties’ Contemplation
The impossibility must be after the constitution of the
This Article refers to moral impossibility or impracticability due
obligation. If it was before there is nothing to extinguish
to the change in certain conditions. This is also referred to as
because the performance was impossible from the start, hence
the Doctrine of the Frustration of the Commercial Object.
the obligation is void. This refers to subsequent impossibility.

Does Not Apply to Real Obligations


Object and Subjective Impossibility
It will be noted that Article 1267 refers to a service or a personal
There is objective impossibility when the act or service in itself
obligation to do or not to do, thus real obligations or of those
without considering the person of the obligor becomes
to give are not included under this article.
impossible like physical or legal impossibility.

It does not cover highly speculative contracts or agreements


There is subjective impossibility when the act or service cannot
like stocks and aleatory contracts such as insurance contracts.
be done by the debtor himself, but it can be accomplished by
others (e.g. illness).
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 114

Requisites for Moral Impossibility SECTION 3


1. The event or change in circumstances could not have CONDONATION OR REMISSION OF DEBT
been foreseen at the time of the execution of the
ARTICLE 1270
contract.
Condonation or remission is essentially gratuitous, and
2. It makes the performance of the contract extremely requires the acceptance by the obligor. It may be made
difficult but not impossible. expressly of impliedly.
3. The event must not be due to the act of any of the
parties. One and the other kind shall be subject to the rules which
4. The contract is for a future prestation. govern Inofficious donations. Express condonation shall,
furthermore comply with the forms of donation.
Example. The duty to construct a railroad when such
Condonation, Defined
construction was possible but very dangerous to life and
Defined as the gratuitous abandonment by the creditor of his
property, is excused by the law. But not the failure to grind
right. It is an act of liberality, by virtue of which, without
sugar cane due to non-construction of the railroad.
receiving any equivalent, the creditor renounces the
enforcement of the obligation, which is extinguished in its
Discredited Theory of Rebus Sic Stantibus
entirety or in part or aspect of the same which the remission
It will endanger contractual relations simply by invoking that
refers. It can either be (1) express or (2) implied.
what has happened is beyond the manifestation of the parties
that it would render impossible. This is based on the doctrine
Requisites of Condonation or Remission
of unforeseen events.
1. That there must be agreement.
ARTICLE 1268 2. The parties must be capacitated and must consent.
When the debt of a thing certain and determinate proceeds 3. That there must be a subject matter (object)
from a criminal offense, the debtor shall not be exempted 4. The cause or consideration must be liberality, it must
from the payment of its price, whatever may be the cause for be essentially gratuitous.
the loss, unless the thing having been offered by him to the 5. Obligation must have been demandable at the time of
person who should receive it, the latter refused without remission (otherwise the remission is useless).
justification to accept it.
6. The remission must not be Inofficious (otherwise it
would be reducible.
Effect of Loss on Criminal Offense
7. Formalities of a donation are required in case of an
GENERAL RULE: It does not extinguish obligation, even if fortuitous
implied condonation.
event intervenes. This is one of the exceptions to the rule that
8. Waivers or remissions are not to be presumed
if the determinate thing is lost through fortuitous events, the
generally, they must be clearly and convincingly
obligation is extinguished.
shown, either by express stipulation or by acts
admitting of no other reasonable explanation.
EXCEPTION:When the creditor (the offended party in a crime) is
in mora accepiendi or default in the part of the creditor.
Class of Remission
As to Effect or Extent
Q. A commits the crime of theft, and is asked to return the car
1. Total
stolen to its owner B, before the car is delivered to B, it is
2. Partial
destroyed by fortuitous event, is A’s liability extinguished?
As Date of Effectivity
A. No. The obligation to deliver arose from a criminal offense
1. Inter vivos (during life)
and in such case, the rule is, he is liable even when loss is
2. Mortis cause (after death)
occurred by fortuitous event.
As to the From
ARTICLE 1269
The obligation having been extinguished by the loss of the 1. Implied or tacit (does not require formality, conduct is
thing, the creditor shall have all the rights of action which the sufficient)
debtor may have against third persons by reason of the loss. 2. Express or formal (this requires the formalities of a
donation if inter vivos; of a will or codicil if mortis
Extent of Creditor’s Rights causa).
Where a vessel guilty of negligence in a collision was the one
which sunk, ordinary its owners are relieved from any liability Unilateral Renunciation
for damages caused by the collision is sunk, ordinarily its obwer Even though condonation is a bilateral act, there is nothing that
are already relieved from liablity for damages caused by the can prevent a creditor from making unilateral renunciation of
collision to other vessels or owners of cargo; but if the vessel, his right, unilateral renunciation by the creditor is expressly
such insurance money is liable for the damages suffered by allowed under Article 6 of the Civil Code on waiver. There can
others. This article also applies to money paid to the debtor be such extinguishment of the obligation by such manner as
upon the expropriation. provided not violative of law or morals or good customs.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 115

ARTICLE 1271 Presumption in Joint or Solidary Obligations


The delivery of a private document evidencing a credit, made Suppose that A and B owe C P100,000, evidenced by a private
voluntarily by the creditor to the debtor, implies the document.
renunciation of the action which the former had against the
1. If evidence of document is found in possession of A
latter.
who is a joint debtor, the presumption is that only A’s
If in order to nullify this waiver it should be claimed to be debt has been remitted.
inofficious, the debtor and his heirs may uphold it by proving 2. If evidence of debt is found in the possession of A who
that the delivery of the documents was made in virtue of is a solidary debtor, the presumption is that the whole
payment of the debt. obligation has been remitted.
3. In both cases, the presumption can be overthrown by
Effect of Delivery of Private Document Evidencing the superior contrary evidence.
Credit Voluntarily by Creditor to Debtor
The article speaks of a private document. The Code ARTICLE 1273
presupposes, that when the creditor delivers a private The renunciation of the principal debt shall extinguish the
document evidencing a debt to his debtor, he surrenders the accessory obligation; but the waiver of the latter shall leave
weapon for the enforcement of his right. This is not true in case the former in force.
of a public document, because there is always a copy in the
NOTE: This article follows the rule that “accessory follows the
archives which can be used to prove the credit.
principal.” A remission of the penalty does not remit the
• The private document must be the original of the
principal obligation, but if the principal obligation is condoned,
original in such cases.
the penalty is also condoned.
Example. Steffi made a PN in favor of Agassi in the amount of
ARTICLE 1274
P100M. After some time, Agassi voluntarily delivered the PN to It is presumed that the accessory obligation of pledge has
Steffi without collecting the P100M. Steffi is now in possession been remitted when the thing pledged, after its delivery to
of said note. There is a disputable presumption that there has the creditor, is found in the possession of the debtor or of a
been a remission. The presumption is merely disputable and third person who owns the thing.
not conclusive because it may be that the instrument was
delivered only for examination by Steffi or for collection. Remission of Pledge
Note here that only the accessory obligation of pledge is
Implied Remission presumed remitted. The principal obligation (the loan) remains
It should be noted that Article is an example of an implied in force) This is a disputable presumption.
remission. Voluntary destruction by the creditor of the (1) Possession by the debtor
instrument is likewise another form of implied remission. The (2) Possession by the third person who owns the thing.
intent to remit however must be proven.
SECTION 4
ARTICLE 1272 CONFUSION OR MERGER OF RIGHTS
Whenever the private document in which the debt appears is
found in the possession of the debtor, it shall be presumed ARTICLE 1275
that the creditor delivered it voluntarily, unless the contrary The obligation is extinguished from the time the characters
is proved. of creditor and debtor are merged in the same person.

Presumption of Voluntary Delivery Merger or Confusion, Defined


While Article 1271 gives a presumption of remission, this article It is the meeting in one person the qualities of creditor and
gives a presumption of voluntary delivery. This against speaks debtor with respect to the same obligation. It erases the
of a private document. This is also a disputable presumption. plurality of subjects of the obligations and extinguishes the
obligation because it is absurd that a person should enforce
Rule if the Instrument of Credit is Still in Creditor’s Hands and obligation against himself.
If the instrument of credit is still in the hands of the creditor,
this is evidence that the debt has not yet been paid, unless the Requisites of a Valid Merger
contrary be full proved. 1. It should take place between principal debtor and
creditor.
To rebut this presumption, a receipt of payment must be 2. The merger must be clear and definite.
presented as such (Agner v. BPI Family Saving Bank, 2013). In 3. The very obligation must be same and identical.
the aforementioned case it was shown that there is a need to 4. The confusion must be total or as regards to the entire
prove that indeed such payment was done because in this case obligation.
the promissory note with chattel mortgage was still in the
possession of the bank while the petitioners allege that they Between Principal Debtor and Creditor
already have paid for the outstanding balance without any Confusion of the creditor with the person of the guarantor does
proof of payment. Thus, the presumption of continuance of not extinguish the principal obligation. No merger if debtor and
debt prevails. creditors represented different juridical entities even if the
officers of both are the same.
NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 116

Example of Merger SECTION 5


A makes a check payable to bearer, and hands the check C, who COMPENSATION
hands it to D, who finally hands it to A. Here A owes to himself.
ARTICLE 1278
This is a clear case of merger; thus, obligation is extinguished.
Compensation shall take place when two persons, in their
own right, are creditors and debtors of each other.
Extinction of Real Rights
Real rights, such as usufruct over the property, may be Compensation, Defined
extinguished by merger when the naked owner himself It is a mode of extinguishing to the concurrent amount, the
becomes the usufructuary. Also known as consolidation of obligations of those persons who in their own rights are
ownership. reciprocally debtors and creditors of each other. It is the
offsetting of two obligations which are being reciprocally
Example. A had two brothers named B and C. A gave a parcel extinguished if they are equal value, or extinguished to the
of land to B in usufruct (right to use and right to the fruits), and concurrent amount if of different values.
the same parcel of to C in naked ownership. If later C donates
the naked ownership of the land to B, B will now have the full It is a sort of balancing between two obligations, it involves a
ownership and it is as if merger has been resulted. figurative operation of weighing two obligations
simultaneously in order to extinguish them to the extent in
Revocation of Merger which the amount is covered by the other.
If the reason for the confusion ceases, the obligation is revived.
When the act which occasions the merger is terminated or Distinguished from Payment
revoked, the obligation is recreated in the same condition that Payment Compensation
it had when the merger took place. Capacity to dispose of the These capacities are not
thing paid and capacity to necessary.
ARTICLE 1276 receive payment are
Merger which takes place in the person of the principal
required for creditor and
debtor or creditor benefits the guarantors. Confusion which
takes place in the person of any of the latter does not debtor.
extinguish the obligation. Operates by the act of the Operations by law.
parties.
Release of Guarantor Performance must be There may be partial
The extinguishment of the principal obligation through complete. extinguishment of
confusion releases the guarantors, because the obligation of obligation.
latter is merely accessory.